Economic Growth in Canada and The United States in The Information Age

Economic Growth in Canada and the
United States in the Information Age

Industry Canada Research Publications Program
The Industry Canada Research Publications Program provides a forum for the
analysis of key micro-economic challenges in the Canadian economy and contributes
to an informed public debate on these issues. Under the direction of the Micro-
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EDITOR: DALE W. JORGENSON
Economic Growth in Canada and the

Industry Canada Research Monograph

National Library of Canada Cataloguing in
Publication Data
Main entry under title-
Economic growth in Canada and the United States in the information age
[electronic resource]
“Industry Canada Research Monograph”

Issued also in French under title: La croissance économique au Canada et
aux États-Unis à l’ère de l’information.
Includes bibliographical references.
Issued also in print format.
Mode of access: Industry Canada website.
ISBN 0-662-36225-X
Cat. no. C21-26/2-2004E-PDF
1. Industrial productivity – Canada.
2. Industrial productivity – United States.
3. Information technology – Economic aspects – Canada.
4. Information technology – Economic aspects – United States.
5. Canada – Economic conditions – 1971-1991.
6. Canada – Economic conditions – 1991- .
7. United States – Economic conditions – 1981-2001.
I. Jorgenson, Dale Weldeau, 1933- .
II. Canada. Industry Canada.
HC79.I52E32 2004 338.4’56’0971 C2004-980077-9
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Table of Contents
CONTRIBUTORS i
FOREWORD iii
1. INTRODUCTION 1
Dale W. Jorgenson
2. INFORMATION TECHNOLOGY AND ECONOMIC GROWTH IN THE

CANADIAN AND U.S. PRIVATE INDUSTRIES 7
Tarek M. Harchaoui, Faouzi Tarkhani & Bilkis Khanam
Abstract 7
Introduction 7
The Extended Accounting Framework 11
Set Up 11
The Production Possibility Frontier 12
Data 14
The Growth Resurgence Quantified 28
Contributions of Information Technology 28
Sources of Economic Growth 36
Sources of Labour Productivity Growth 42
The Sectoral Sources of Multifactor Productivity Growth 44
Motivation 44
Methodology and Data Sources 44
Empirical Results 46
Concluding Remarks 50
Endnotes 52
Acknowledgments 54
Bibliography 54
3. INFORMATION TECHNOLOGY AND PRODUCTIVITY GROWTH:
EVIDENCE FROM CANADIAN INDUSTRIES 57
Wulong Gu & Weimin Wang
Abstract 57
Introduction 57
Data Sources 59
Output and Productivity Growth for the Business Sector 60
Is the Productivity Growth Revival Linked to IT? 64
Is the Productivity Acceleration Widespread? 64
Aggregation over Industries 66
The Link Between IT and the Productivity Revival
Across Industries 68
Robustness Checks 71
The Role of Human Capital and Trade Openness for
Productivity Growth 74
Conclusion 76
Endnotes 77
Acknowledgments 78
Bibliography 78
Appendix 81
4. SOURCES OF OUTPUT GROWTH IN CANADIAN AND

U.S. INDUSTRIES IN THE INFORMATION AGE 83
Mun S. Ho, Someshwar Rao & Jianmin Tang
Abstract 83
Introduction 83
Empirical Framework 89
Industry Analysis 89
Industrial Contributions to Aggregate Productivity Growth 91
Data and Measurement Issues 94
Capital Input 95
Labour Input 98
Growth Accounting Results 100
Sources of Economic Growth at the Industry Level 100
Sources of Labour Productivity Growth at the Industry Level 114
Aggregate Growth and Sector Contributions 127
Conclusions 149
Endnotes 150
Acknowledgments 153
Bibliography 153
Appendix A 157
Appendix B 160
INDUSTRY CANADA RESEARCH PUBLICATIONS 167

Contributors
Wulong Gu
Statistics Canada
Tarek M. Harchaoui
Statistics Canada
Mun S. Ho
Resources for the Future
Dale W. Jorgenson
Harvard University
Bilkis Khanam
Industry Canada
Someshwar Rao
Industry Canada
Jianmin Tang
Industry Canada
Faouzi Tarkhani
Statistics Canada
Weimin Wang
Industry Canada
i
Foreword
T HE THREE STUDIES PUBLISHED IN THIS MONOGRAPH have employed different

concepts and methods for quantifying the contribution of information
technologies to economic growth and productivity performance in Canada
and the United States. However, their underlying data conform to the
international standards recommended by the Organisation for Economic Co-
operation and Development. Harchaoui, Tarkhani and Khanam have used
an aggregate approach based on national accounts data (final demand gross
domestic product), compared to the bottom-up approach by Ho, Rao and
Tang and the econometric approach by Gu and Wang. Both papers have
employed KLEMS (capital, labour, energy, materials, and services) based
industry data. Despite differences in their approaches, the conclusions of the
three studies are broadly similar.
The monograph is the result of the collaborative effort of Industry Canada,

Statistics Canada and Harvard University. Within Industry Canada, the
Policy Sector, the Industry Sector and the Spectrum, Information
Technologies and Telecommunications Sector worked together on the
project. The conclusions in the monograph reflect the views of the authors,
but not necessarily those of Industry Canada, Statistics Canada and the
institutions the authors are affiliated with.
iii
Introduction:
Economic Growth in Canada and the 1

Dale W. Jorgenson
T HE U.S. ECONOMY HAS UNDERGONE A REMARKABLE RESURGENCE since the mid-

1990s with accelerating growth in output, labour productivity, and total fac-
tor productivity. Jorgenson (2002) has shown that information technology has
been an important driving force in the revival of the American economy. Canadian
economic performance has also improved dramatically during the late 1990s.
However, there are important differences between the Canadian and U.S.
economies, especially in the relative importance of industries producing informa-
tion technology (IT) equipment and software.
The purpose of this volume is to compare and analyze the sources of economic
growth in Canada and the United States over the past two decades. This repre-
sents a continuation of the research program initially reported in the Industry
Canada monograph, Industry-level Productivity and International Competitiveness
between Canada and the United States, edited by Jorgenson and Lee (2001). The
current volume incorporates important new data on productivity in Canada
presented in the Statistics Canada monograph, Productivity Growth in Canada –
2002, edited by Baldwin and Harchaoui (2003).
In Chapter 2, Harchaoui, Tarkhani, and Khanam provide a detailed comparison

of the forces behind the expansion of the private sectors in the Canadian and U.S.
economies between 1981 and 2000. For the period as a whole, U.S. economic
growth outstripped that in Canada by nearly a full percentage point. The contri-
bution of capital services was the most important source of growth in both coun-
tries, while the contribution of labour services was next in importance. Growth of
multifactor productivity was slightly negative for the two decades in Canada,
but positive and substantial in the United States during the same period.
1
Jorgenson
Both Canada and the United States experienced a slowdown during the period
1988-1995 and a sharp rebound after 1995. The slowdown in Canada before 1995
was much more severe than in the United States. The recovery in Canada was
powered by a strong revival of multifactor productivity growth, a surge in the
contribution of non-IT capital services, and rapid growth of the contribution of
labour services from non-college educated workers. The contribution of invest-
ment in IT rose in both countries, but grew far more rapidly in the United States.
The contribution of non-IT investment jumped considerably in both countries.
Harchaoui, Tarkhani, and Khanam present a detailed comparison of data for

Canada and the United States. The Canadian data for their study are drawn from
the Statistics Canada KLEMS (capital, labour, energy, materials, and services)
data base, described in greater detail in the monograph by Baldwin and Harchaoui
(2003). The U.S. data are taken from Jorgenson, Ho, and Stiroh (forthcoming). The
close similarities between data sources and methodology for the two countries
make it possible to trace the differences outlined above to differences in the
structure and behaviour of the two economies.
In Chapter 3, Gu and Wang analyze the sources of economic growth for

122 Canadian industries, using the most detailed version of the Statistics Canada
KLEMS data base. They divide these industries between 33 IT-intensive indus-
tries and 89 non-IT intensive industries. The strong revival of multifactor produc-
tivity growth after 1995 is the most important source of the Canadian growth re-
vival; they show that this is pervasive among Canadian industries. Capital deepen-
ing due to investment in IT is relatively unimportant in the Canadian revival by
contrast with the United States.
The surge in multifactor productivity growth in Canada after 1995 was strongest
in IT-intensive industries. Gu and Wang attribute this to IT-induced organiza-
tional innovation and network effects. They find that IT-intensive industries
made relatively little contribution to multifactor productivity growth before
1995. They also find that industries that had a larger share of university-educated
workers made larger productivity gains after 1995. A possible explanation is that
these workers are complementary to investments in IT equipment and software.
The Canadian KLEMS data base employed by Gu and Wang incorporates the
results of recent research on the impact of changes in the composition of the
Canadian labour force by age, sex, and education by Gu, Kaci, Maynard, and
Sillamaa (2003). It also includes new estimates of capital inputs for Canadian
industries by Harchaoui and Tarkhani (2003). These estimates reflect differences
2
Introduction
in the behaviour of investment goods prices, for example, between IT and non-IT
investment goods. The estimates also incorporate differences in service lives,
depreciation rates, and tax treatments among different types of assets.
In Chapter 4, Ho, Rao, and Tang compare the sources of output growth for
34 industries in Canada and the United States. They show that IT-producing
industries were the sources of much of the acceleration in multifactor productiv-
ity growth in the United States after 1995. The proportion of university-educated
workers in the employed labour force is much smaller in Canada than the United
States. Growth in the contribution of these workers to the growth of labour input
was another important source of the U.S. growth resurgence in the late 1990s.
In order to isolate the differences in the behaviour of individual industries in Canada

and the United States, Ho, Rao, and Tang have separated the 34 industries into
three groups — IT-producing industries, IT-intensive industries, and industries
that are not IT-intensive. They classify 3 industries — computers; communication
and electronic equipment; and communications — as IT-producing industries,
9 other industries as IT-intensive industries, and the remaining 22 industries as
non-IT-intensive industries.
The IT-producing industries grew at phenomenal rates in both Canada and the
United States during the period 1981-2000, far exceeding the average of other
industries. These industries contributed substantially more to U.S. than Canadian
economic growth because of their greater relative importance in the U.S. econ-
omy. All three groups of industries contributed to the acceleration of economic
growth in Canada and the United States after 1995. However, most of the accel-
eration in Canada was due to the non-IT-intensive industries, while in the United
States, the acceleration took place mainly in the IT-intensive industries.
The results of this study are critically important in evaluating the prospects for
future growth in Canada and the United States. Jorgenson, Ho, and Stiroh (2003)
have shown that the rapid pace of economic growth in the United States during
the late 1990s was not sustainable. This involved an expansion of hours worked at
twice the rate of the growth of the working age population. The unemployment
rate plummeted and the rate of participation in the labour force increased. None-
theless, prospects for potential growth at sustainable rates have improved.
3
Jorgenson
Jorgenson, Ho, and Stiroh (2003) have undertaken a similar, but less detailed,
analysis of prospects for future Canadian economic growth. They project more
rapid growth for the Canadian labour force than the United States. Labour quality,
defined as labour input per hour worked, is also projected to grow more rapidly
in Canada than in the United States as Canadian levels of educational attainment
approach U.S. levels. However, multifactor productivity growth is projected to
be slower in Canada than in the United States, mainly due to the greater relative
importance of IT-producing industries in the United States.
Growth rates for the two countries are gradually converging, but the growth
potential for Canada remains about half a percentage point below the United
States. In both countries, projections of future growth are characterized by sub-
stantial uncertainties. For the United States, these arise from the role of IT in-
vestment and the future growth of multifactor productivity in the IT-producing
industries. For Canada, the growth rate of multifactor productivity outside these
industries and the rate at which IT equipment and software can be substituted
for other types of capital inputs are associated with important uncertainties.
Bibliography
Baldwin, J.R., and T.M. Harchaoui, eds. Productivity Growth in Canada – 2002. Ottawa:
Statistics Canada Catalogue No. 15-204-XPE, 2003.
Gu, W., M. Kaci, J.-P. Maynard, and M. Sillamaa. “The Changing Composition of the Ca-
nadian Workforce and its Impact on Productivity Growth.” In Productivity Growth
in Canada - 2002. Edited by J.R. Baldwin, and T.M. Harchaoui. Ottawa: Statistics
Canada Catalogue No. 15-204-XPE, 2003.
Harchaoui T.M., and F. Tarkhani. “A Comprehensive Revision of the Capital Input Meth-
odology for Statistics Canada Multifactor Productivity.” In Productivity Growth in
Canada - 2002. Edited by J.R. Baldwin, and T.M. Harchaoui. Ottawa: Statistics Canada
Catalogue No. 15-204-XPE, 2003.
Jorgenson, D.W., ed. “Information Technology and the U.S. Economy.” In Economic Growth
in the Information Age. Cambridge: MIT Press, 2002, pp. 1-42.
Jorgenson, D.W., M.S. Ho, and K.J. Stiroh. “Growth in U.S. Industries and Investments in
Information Technology and Higher Education.” In Measuring Capital in the New
Economy. Edited by C. Corrado, J.C. Haltiwanger, and D. Sichel. Chicago: University
of Chicago Press. Forthcoming.
4
Introduction
⎯⎯⎯. “Lessons for Canada from the U.S. Growth Resurgence.” International Productivity
Monitor 6 (Spring 2003): pp. 3-18.
Jorgenson, D.W., and F.C. Lee, eds. Industry-level Productivity and International Competitiveness
between Canada and the United States. Research Monograph. Ottawa: Industry Canada,
2001.
5
Information Technology and Economic Growth in the 2
Canadian and U.S. Private Economies
Tarek M. Harchaoui, Faouzi Tarkhani & Bilkis Khanam
Abstract
T HIS STUDY USES NEW DATA at both the aggregate and industry levels to shed
additional evidence on the sources of growth for labour productivity and eco-
nomic growth in the Canadian and U.S. private economies over the period 1981-
2000. The principal innovation is the incorporation of the service flows of con-
sumer durables and housing in the aggregate production framework. Another
feature of this study is the use of new industry data and the distinction between
university and non-university workers to capture the extent to which invest-
ments in higher education and information technology have contributed to eco-
nomic growth and productivity performance. The new results confirm the basic
story laid out in our earlier work—while information technology accounted for
much of the U.S. productivity revival, it played a modest role in Canada, thereby
suggesting different forces at work in the two countries.
Introduction
C ONSIDERABLE UNCERTAINTY HANGS OVER the world economy at present. While

the future remains uncertain, it is clear that Canada and the United States
have undergone a remarkable transformation in recent years, with growth in
output, labour productivity, and multifactor productivity all accelerating since
the mid-1990s. This growth resurgence has led to a widening debate about the
sources of this growth and whether profound changes have taken place in the
structure of the two economies.
The conjunction of an information technology boom and an acceleration in pro-

ductivity growth in the United States in the second half of the 1990s excited talk
of a new economy, though some enthusiasm for the concept has subsided in the
wake of the tech wreck. But a more sober new economy discussion continues.
7
Harchaoui, Tarkhani & Khanam
The focus is on the link between information technology and its effect on eco-
nomic growth and productivity growth.1
There are many examples of cutting-edge businesses in the United States, such as
IBM and Wal-Mart, that produce and use information technology effectively.
While it is often argued that Canada is not a major producer of information tech-
nology, research conducted in Canada shows that information technology con-
tributed substantially to the growth of gross domestic product (GDP), capital
formation and productivity.2 It is clear that the impact of investment in informa-
tion technology on both the Canadian and U.S. economies has been substantial.
But how and to what degree do the effects of this investment differ between the
two countries?
In order to compare the relationships between investment in information tech-

nology, economic growth and productivity performance in Canada and the
United States, it is essential to eliminate the differences in measurement of out-
put and inputs in the official statistics. In keeping with best practice, recent Canada-
U.S. comparisons produced by Statistics Canada have employed concepts and
methods that accord with the Organisation for Economic Co-operation and
Development (OECD) productivity manual (OECD 2001).3
Harchaoui, et al. (2002) outlined that the late 1990s were exceptional in compari-
son with the growth experience of the Canadian and the U.S. business sectors
over the past quarter century as a whole. Although growth rates have not re-
turned to those of the golden age of the two economies in the early 1960s, the
data nonetheless clearly revealed a remarkable transformation. After more than
20 years of sluggish multifactor productivity growth, 4 of the 5 years ending in
2000 saw growth rates near 1 percent. This acceleration of multifactor productiv-
ity growth was one of the most remarkable features of the data, suggesting mas-
sive improvements in technology and increases in the efficiency of production.
Harchaoui and Tarkhani (2004a) refined and extended that analysis by using an
augmented aggregate growth accounting framework fully integrated to a sec-
toral model to trace the various channels through which information technology
operates. Their results suggest that while information technology is indeed the
story in the U.S. productivity revival, it is only part of it in the Canadian context.
The labour productivity revival is primarily attributable to information technology
capital deepening and multifactor productivity gains of information technology-
producing industries. The Canadian evidence points towards the importance of
8
Information Technology and Economic Growth
multifactor productivity gains in information technology-using industries as a

major source of productivity acceleration.
To assess the robustness of our earlier work, this study extends our initial
framework and exploits a new data set on the sources of growth for Canada and
the United States over the 1981-2000 period.4 We extend our contribution in the
following directions.
First, we extend our coverage from the business sector to the private domestic
economy. This notion comprises the business sector itself and owner-occupied
housing, thereby improving our coverage and making it more consistent with the
System of National Accounts’ domain of definition.5
Second, we measure the service flow from the stock of durables in lieu of expen-
diture.6 The purchase of consumer durables is recorded as capital investment and
the service flow from the stock of durables as consumption, since the latter repre-
sents the portion actually consumed in a given period. This approach is appeal-
ing for two reasons: a) it makes the treatment of consumer durables similar to
that used in the System of National Accounts to account for rents of owner-
occupied dwellings, and b) it also makes the treatment of consumer durables
symmetric to the one already in place in the productivity accounts for the meas-
urement of producers durable goods.
Third, on the labour side, university-educated workers are often identified as

knowledge workers who make use of information technology, so we have divided
labour input between university and non-university workers to capture the ex-
tent to which investments in higher education and information technology have
contributed to economic growth and productivity performance in Canada and
the United States. While the growth of labour input from university-educated
workers has predominated over growth from non-university workers for the
period 1981-2000, the contribution of non-university workers is also important.
The substitution of university-educated workers for non-university workers has
been an important mechanism for restructuring the Canadian and U.S. work
forces. This reflects the increased role of knowledge workers in many industries,
especially those that have invested large amounts in information technology
equipment.
Fourth, an important feature of our methodology is the explicit role provided for
intermediate inputs. Consider, for example, the output of the semiconductor in-
dustry. Much of this output is invisible at the aggregate level, since semiconductor
9
products are mainly inputs into other industries rather than deliveries to final
demand as consumption and investment goods. Semiconductor inputs, however,
play a key role in the improvements in the quality and performance of com-
puters, communications equipment, instruments, and a host of other products
(see Jorgenson 2001).
More specifically, semiconductors are an output of the electronic components

industry, but appear as intermediate inputs into computers, communications
equipment, and other industries. Price declines resulting from improvements in
semiconductor technology are reflected in the large contributions of intermediate
inputs in the industries that consume semiconductors. By accurately accounting
for intermediate inputs through the use of inter-industry transactions tables, we
can allocate Canadian and U.S. economic growth to its sources in individual
industries.
The results obtained in this study continue to support the basic story laid out in
our earlier work; namely, the data still show a substantial pickup in the U.S. la-
bour productivity growth in the late 1990s and indicate that efficiency gains as-
sociated with the production of information technology were central factors in
that resurgence. This contrasts with the Canadian evidence where the bulk of the
increase of labour productivity was attributable to efficiency gains outside the
information technology-producing industries. Interestingly, the Canadian story
remains intact even with the adoption of international harmonized prices for
information technology-producing industries.
This top down approach, which tries to allocate final demand GDP growth to
information technology-producing industries and information technology-using
industries, is complemented by the bottom up analysis employed by Ho, Rao and
Tang, in this volume. The latter uses detailed industry-level data to trace the
sources of Canada-U.S. economic growth to their industry origins, to isolate and
analyze the industries that use information technology, and to ascertain the rela-
tive importance of productivity growth and factor accumulation. Their results,
consistent with ours, have shown that information technology is indeed the story
for the U.S. productivity revival, compared to Canada, where it has made a mod-
est contribution. Information technology-using and non-using industries gener-
ated all of the multifactor productivity revival of the Canadian business sector.
Using a parametric framework for detailed Canadian industry data, Gu and
Wang in this volume have attributed Canada’s productivity surge to information
technology-induced organizational changes and possible spillover effects.
10
The remainder of this study is as follows: The next section extends the coverage
of Harchaoui and Tarkhani (2004a) to incorporate the service flows of durables
and housing. We employ a methodology developed by Jorgenson and Stiroh
(2000) and summarize it briefly. The following section presents our results of the
trend growth of output, inputs and productivity for Canada and the United States
over the 1981-2000 period. The last section concludes the study.
The Extended Accounting Framework
Set Up
O UR ANALYSIS OF THE SOURCES OF ECONOMIC GROWTH employs an aggregate

production possibility frontier to examine how capital input, labour input,
and technology, are used to create the private sector output of consumption
commodities, investment goods, and net exports. It captures substitution be-
tween investment and consumption goods on the output side and between capi-
tal and labour inputs on the input side.
This aggregate framework serves as the basis for this study. Recent work that
implemented this approach includes Jorgenson and Stiroh (2000) and Jorgenson
(2001) for the U.S. economy; Jorgenson and Yip (2001) and Dougherty and
Jorgenson (1997) for international comparisons, and Harchaoui and Tarkhani
(2004a) for a Canada-U.S. comparison of economic growth and productivity per-
formance.
Following Christensen and Jorgenson (1973), this study introduces several

changes to the production framework that was employed in our previous work.
Since the household sector is included in the production sector, the capital ser-
vice flow from consumer durables must be treated as both an output and input
of households.
The imputed capital services from owner-occupied housing are included in the
Canadian System of National Accounts (CSNA) and U.S. National Income and
Product Accounts (NIPA) but not in the productivity accounts of the two coun-
tries. In this study, we make these two sets of accounts consistent as far as the
treatment of housing is concerned. The flows of capital services resulting from
investment in housing by owner-occupiers and investment in structures by
11
households are added to the notion of the business sector used by the productiv-
ity accounts of the two countries.
In addition, we treat other types of consumer durables, including information

technology assets, in the same way as housing. The idea of capitalizing consumer
durables in the CSNA and the NIPA has been discussed for many years.7 Cur-
rently expenditures for consumer durables are treated as consumption expendi-
tures rather than investment expenditures. Capitalizing consumer durables
would reallocate expenditures for them from personal consumption expendi-
tures to gross private domestic investment and would increase GDP by the
amount of services they provide equal to the rental value of the durables.
We treat housing and consumer durables consistently and include both of the
two assets in the capital input, and the flow of services from the installed stock of
each in consumption in the aggregate production function. The purchase of new
housing and consumer durables are treated as investment.
The Production Possibility Frontier
In the production possibility frontier, output (Y) consists of consumption goods

(C), investment goods (I), and other components (O). These outputs are produced
from aggregate input (X), consisting of capital services (K) and labour services
(L). These outputs can be further decomposed into information technology out-
put (YIT) and non-information technology output (YNIT). Information technology
outputs include information technology investment goods—computer hardware
(IC), computer software (IS), communications equipment (IM) — information
technology capital services to households (CIT) and other information technology
components (OIT) (information technology services, net exports, etc.). This is also
done for the components of the aggregate non-information technology output
(YNIT). Likewise, capital services can be decomposed into the capital service flows
from hardware (KC), software (KS), communications equipment (KM), and all
other capital services (Ko).8 A similar decomposition was performed for labour
input between university (LU) and non-university (LNU) workers. The input func-
tion (X) is augmented by multifactor productivity (A).
12
The production possibility frontier can be represented as:
Y [ YIT ( I IT , C IT , OIT ) , YNIT ( I NIT , C NIT , ONIT ) ] =

(1)
A ⋅ X [ K IT ( t ) , KOME ( t ) , KS ( t ) , LU ( t ) , LNU ( t ) ] .
Under the standard assumptions of competitive product and factor markets, and
constant returns to scale, Equation (1) can be transformed into an equation that
accounts for the sources of economic growth:
wYIT ∆lnYIT + wYNIT ∆lnYNIT = vK IT ∆lnK IT + vKOME ∆lnKOME + vKS ∆lnKS

(2)
+ vLU ∆lnLU + vLNU ∆lnLNU + ∆lnA,
where ∆x ≡ xt – xt–1. w denotes the average output shares and v the average
input shares of the subscripted variables; the shares are averaged over period t
and t–1, and wY + wY = vK + vK + vK + vL + vL = 1.0 . We refer to the share-
IT NIT IT OME S U NU
weighted growth rates in equation (2) as the contributions of the inputs and
outputs.
Labour productivity is defined as the ratio of output to hours worked, so that

Y , where the lower-case variable (y) denotes output (Y) per hour (H).
LP ≡ y = H
Equation (2) can be rewritten in per hour terms as:
∆lny = vKNIT ∆lnkNIT + vK IT ∆lnkIT + vLU ∆lnA U + vLNU ∆lnA NU

(3)
+ ( vLU ∆lnhU + vLNU ∆lnhNU ) + ∆lnAt ,
where vK = vK + vK + vK and vK = vK + vK ; ∆lnkIT and ∆ ln kNIT are, respec-

IT C S T NIT OME S
tively, the growth of information technology and non-information technology

capital services per hour (capital deepening); ∆lnA u and ∆lnA NU are, respectively,
the growth of labour quality of university-workers and non-university workers;
and ∆ ln hU and ∆ ln hNU are, respectively, the growth of hours of university-
workers and non-university workers per total hours worked.
Equation (3) decomposes labour productivity growth into three sources. The first
is capital deepening, defined as the contribution of capital services per hour,
which is decomposed into non-information technology and information technol-
ogy components. The interpretation of capital deepening is that additional capi-
tal per hour makes workers more productive in proportion to the capital share.
The third and fourth terms capture labour quality improvement, defined as the
13
contribution of labour input per hour worked, for university and non-university
workers, respectively. This reflects changes in the composition of the workforce
and raises labour productivity in proportion to the labour share of each category
of workers. The fifth term, hours reallocation, reflects compositional shifts be-
tween university and non-university workers. The last term is multifactor pro-
ductivity growth, which raises labour productivity growth point-for-point.
Data
We briefly summarize the data required to implement Equations (1) to (3) here.
More detailed descriptions are available in Ho and Jorgenson (1999) and the
appendices of Jorgenson and Stiroh (2000) and Jorgenson, Ho, and Stiroh (forth-
coming) for the U.S. data, and Baldwin and Harchaoui (2003) for the Canadian
productivity accounts.
Output
The aggregate data are based on the most recent benchmark revision of the
Canadian and U.S. national accounts, updated through 2000. These data are
based on Income and Expenditures Accounts (IEAs) and the NIPAs maintained,
respectively, by Statistics Canada and the U.S. Bureau of Economic Analysis.
These accounts provide measures of final demand GDP in both current and
chained dollars. The framework developed in this study calls for a broader
treatment of output than the official ones used in national accounts and produc-
tivity programs of the two countries. First, the services of owner-occupied hous-
ing and structures utilized by households are included in the GDP, thereby
making the coverage of the productivity accounts in line with that of national
accounts of the two countries. Second, consumer durable goods are treated sym-
metrically with investment in housing, since both are long-lived assets that are
accumulated and provide a flow of services over their lifetimes. We use a rental
price to impute a flow of consumer durables services included in both consump-
tion and capital input. The value of the service flow of housing are imputed from
rental values available from the IEAs and the NIPAs.9
Table 1 provides information on the value of outputs and inputs for 1981 and
2000 and Tables 2a and 2b report the average annual growth rates of quantity
and prices for these outputs and inputs, respectively, for Canada and the United
States for the following periods: 1981-2000, 1981-88, 1988-2000, 1988-95 and 1995-
2000. While these time periods are conventional for the Canada-U.S. comparison
in terms of multifactor productivity growth, a word about the choice of the periods
14
is useful at this point. The year 1981 is the first year in our KLEMS (capital, la-
bour, energy, materials, and services) data set for which the data are compara-
ble.10 The years 1988 and 2000 are, respectively, the first and the second peak of
the cycle in the period we cover; the year 1995 corresponds to a surge in eco-
nomic growth.
The Canadian and U.S. concepts of output are similar, but not identical, to the
official concept of gross domestic product. Our output measure is somewhat
broader than the one used in the official Canada-U.S. productivity statistics, pub-
lished by Statistics Canada (2002) and the Bureau of Labor Statistics (BLS) (2002),
and employed by Harchaoui et al. (2002) and Harchaoui and Tarkhani (2004a).
Both measures include final outputs purchased by households, businesses, and
the rest of the world. The output measures in Table 1, unlike the one used in our
previous work, includes imputations for the service flows from housing and dura-
ble goods, including information technology products, employed in the household
sector.
The imputations for services of information technology assets are based on the
cost of capital for information technology described in more detail below. The
cost of capital is multiplied by the nominal value of information technology capi-
tal stock to obtain the imputed service flow from information technology assets.
In the business sector, this accrues as capital income to the firms that employ
these products as inputs. In the household sector, the flow of capital income
must be imputed. This same type of imputation is used for housing in the IEAs
in Canada and the NIPAs in the United States. The rental value of renter-
occupied housing accrues to real estate firms as capital income, while the rental
value of owner-occupied housing is imputed to households.
Output includes investment goods in the form of computers, software, commu-

nication equipment, and non-information investment goods. It also includes
outputs and non-information technology consumption goods and services, im-
puted information technology capital service flows from households and net
exports. Canadian current dollar GDP was $978.4 billion in 2000 ($9.4 trillion for
the United States), including imputations, and real output growth averaged
2.7 percent (3.7 percent for the United States) for the period 1981-2000 (see Table 1
and Tables 2a and 2b). These magnitudes can be compared to the current dollar
value of $774 billion in 2000 for Canada ($7.7 trillion in 2000 for the United States)
and the average real growth rate of 3.1 percent for period 1981-2000 for the offi-
cial Canadian business sector GDP (3.9 percent for the United States).
15
Table 1
Information Technology Outputs and Inputs ($ billion)
Canada United States

1981 2000 1981 2000
Gross Domestic Product (GDP) 326.6 978.4 2,885.9 9,350.7
Information Technology GDP 6.9 43.3 109.0 616.6
Computer and Software Consumption 0.2 3.3 0.4 34.3
Computer Investment 2.6 12.4 17.1 109.3
Software Investment 1.1 15.4 16.1 198.2
Communication Investment 2.1 7.0 37.2 135.6
Consumer Durable Services 0.2 3.6 0.3 42.2
Communication Services 3.0 11.3 30.9 131.3
Other –2.2 –9.8 –3.8 –12.5
Non-information Technology GDP 319.7 935.1 2,776.9 8,734.1
Housing Services 31.2 109.0 131.3 387.2
Housing Investment 21.5 48.8 118.9 416.9
Other 267.0 777.3 2,526.7 7,930.0
Capital Compensation 168.4 517.3 1,110.1 3,636.7

Information technology 5.2 34.9 50.8 424.9
Computers 2.3 13.0 14.9 111.0
Communication 2.1 7.1 12.2 160.8
Software 0.6 10.9 23.3 110.9
Consumer Durable Services 0.2 3.9 0.3 42.2
Non-information Technology 163.2 482.3 1,059.3 3,211.8
Other Machinery and Equipment 25.2 82.4 207.0 700.0
Other Durables 35.8 88.9 273.5 905.7
Structures 102.2 311.1 578.8 1,606.1
Housing 40.0 140.4 203.0 594.1
Other 62.2 158.6 375.8 1,012.1
Labour Compensation 158.2 461.1 1,645.8 5,112.9

University-educated Workers 17.3 115.6 381.2 1,989.5
Non-university-educated Workers 140.9 345.5 1,264.5 3,123.4
16
The most striking feature of the data in Tables 2a and 2b is the rapid price decline
for computer investment, 15.3 percent per year for Canada from 1981 to 2000
(15.5 percent for the United States). At less than 3 percent per year during this
period in both Canada and the United States, the price of software declined less
rapidly than that of computers (–2.11 percent for Canada and –0.7 percent for the
United States). In contrast, the price of telecommunication equipment behaved
slightly differently between Canada and the United States (a 0.6 percent increase
in Canada, compared to a 0.1 percent decline for the United States), while the
service flows of consumers information technology durable goods show less
rapid price declines in Canada compared to the United States (–9.3 percent com-
pared to –19.4 percent).
Business investments in computers, software, and communication equipment are

the largest categories of information technology spending. Households have also
spent sizable amounts on computers, software, communication equipment and
the services of information technology.
Figures 1a and 1b show that the output of information technology equipment

(computers, software and communication investments) is the largest information
technology category as a share of GDP, followed by the outputs of communica-
tion services and the services flows of durables in both Canada and the United
States. In contrast, the share of information technology consumption remained
fairly small over the 1981-2000 period.
Capital Services
This section presents the estimates of capital services for the Canadian and U.S.
private economies for the period 1981 to 2000. These begin with IEA and NIPA
investment data; the perpetual inventory method generates estimates of capital
stocks and these are aggregated, using service prices as weights. This approach,
originated by Jorgenson and Griliches (1967), is based on the identification of
service prices with marginal products of different types of capital. The service
price estimates incorporate the cost of capital, an annualization factor that trans-
forms the price of an asset into the price of the corresponding capital input. The
cost of capital includes the nominal rate of return, the rate of depreciation, and
the rate of capital loss due to declining prices.
17
18

Table 2a
Growth Rates of Outputs and Inputs, Canada (average annual percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Price Quantity Price Quantity Price Quantity Price Quantity Price Quantity
Gross Domestic Product (GDP) 3.2 2.7 4.6 3.2 2.4 2.4 2.9 0.9 1.7 4.5
Information Technology-GDP –3.7 14.4 –1.7 12.2 –4.8 15.6 –5.1 11.7 –4.3 21.4
Computers and Software Consumption –8.6 26.5 –11.3 42.0 –7.0 18.2 –4.1 17.5 –10.8 19.1
Computers Investment –15.3 28.3 –16.1 28.3 –14.8 28.4 –13.5 21.5 –16.7 38.7
Software Investment –2.1 17.5 –0.9 21.4 –2.8 15.3 –4.2 14.7 –1.0 16.3
Communication Investment 0.6 5.9 4.1 3.2 –1.4 7.6 –2.3 5.5 –0.1 10.5
Consumer Durable Services –9.3 28.5 –13.2 44.2 –7.0 20.1 –4.5 21.1 –10.5 18.7
Communication Services 1.1 6.2 2.4 6.0 0.3 6.2 –0.6 5.6 1.5 7.2
Other –7.2 16.6 –10.1 25.9 –5.6 11.5 –4.1 14.2 –7.6 7.8
Non-information Technology-GDP 3.4 2.4 4.7 3.0 2.6 2.0 3.1 0.6 1.9 3.9
Housing Services 3.3 3.4 5.7 3.8 2.0 3.1 3.2 3.3 0.2 2.9
Housing Investment 3.1 1.2 5.3 4.8 1.9 –0.8 2.2 –4.4 1.5 4.5
Other 3.4 2.3 4.5 2.8 2.7 2.0 3.2 0.6 2.2 4.0
Capital Services 3.4 2.6 5.2 2.9 2.4 2.4 2.3 1.8 2.5 3.2
Information Technology –7.0 18.9 –5.1 20.1 –8.1 18.2 –8.4 15.6 –7.8 22.0
Computers –15.2 29.1 –14.9 29.4 –15.4 28.9 –14.5 21.8 –16.6 39.5
Communication 1.2 5.4 7.2 2.8 –2.1 7.0 –4.8 6.4 1.8 7.9
Software –2.1 18.9 2.4 24.5 –4.6 15.7 –6.0 16.0 –2.6 15.3
Consumer Durable Services –9.3 28.5 –13.0 44.2 –7.1 20.1 –4.8 21.1 –10.2 18.7
Table 2a (cont’d)
Growth Rates of Outputs and Inputs, Canada (average annual percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Non-information Technology 3.8 2.0 4.9 3.0 3.2 1.4 2.9 1.1 3.6 1.8
Other Machinery and Equipment 4.3 2.0 8.6 1.5 2.0 2.3 2.0 1.0 1.9 4.3
Other Durables 3.7 1.1 3.9 3.3 3.6 –0.1 4.8 –1.0 2.0 1.2
Structures 3.7 2.2 4.3 3.3 3.4 1.6 2.7 1.8 4.5 1.3
Housing 3.8 2.9 4.0 5.3 3.7 1.6 3.3 2.4 4.2 0.5
Other 3.8 1.6 4.7 1.8 3.2 1.6 2.2 1.3 4.6 2.0

Labour Services 3.4 2.4 4.9 2.6 2.4 2.2 2.2 1.2 2.8 3.8
University-educated Workers 4.4 5.9 4.6 6.5 4.3 5.6 5.0 5.1 3.4 6.3
Non-university-educated Workers 3.1 1.6 5.0 2.0 2.1 1.4 1.7 0.3 2.6 3.1
Addendum
Hours at Work 1.6 2.0 1.5 0.3 3.1
University-educated Workers 5.5 6.0 5.2 4.6 6.0
Non-university-educated Workers 1.1 1.6 0.9 -0.3 2.6
19
20

Table 2b
Growth Rates of Outputs and Inputs, United States (average annual percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Gross Domestic Product (GDP) 2.6 3.7 3.7 3.8 1.9 3.7 2.5 2.9 1.1 4.8
Information Technology-GDP -4.9 15.2 -2.6 13.2 -6.3 16.5 -4.3 11.9 -9.0 23.2
Computers and Software Consumption -19.8 57.7 -16.3 83.9 -21.8 44.1 -17.2 38.2 -27.8 52.8
Computers Investment -15.5 30.4 -13.9 30.2 -16.4 30.6 -12.0 22.6 -22.1 42.6
Software Investment -0.7 14.9 0.4 15.7 -1.3 14.4 -1.5 12.4 -1.0 17.3
Communication Investment -0.1 7.2 1.6 4.4 -1.1 8.9 -0.4 3.8 -2.2 16.3
Consumer Durable Services -19.4 60.4 -17.8 91.9 -20.4 44.4 -13.9 38.4 -28.7 53.3
Communication Services 1.1 6.8 3.6 4.6 -0.4 8.0 0.4 6.7 -1.5 10.0
Other 3.0 3.2 4.0 3.4 2.4 3.0 2.9 2.5 1.7 3.7
Non-Information Technology-GDP 2.7 3.1 7.8 3.3 -0.2 3.0 0.5 2.8 -1.2 3.3
Housing Services 3.3 3.4 4.0 5.6 3.0 2.1 2.8 0.1 3.3 5.0
Housing Investment 3.0 3.1 3.8 3.3 2.5 3.1 3.0 2.6 1.8 3.7
Other 2.1 2.3 3.5 3.1 2.1 2.4 1.7 2.0 1.9 2.2
Capital Services 2.1 4.2 4.3 4.3 0.9 4.2 1.5 3.1 -0.1 5.8
Information Technology -6.2 19.3 -5.1 22.1 -6.9 17.6 -2.8 12.6 -12.4 25.1
Computers -13.2 28.1 -12.0 34.0 -13.9 24.8 -8.0 13.8 -21.5 41.8
Communication -0.8 15.4 1.0 15.7 -1.7 15.2 -1.4 14.3 -2.3 16.4
Software 1.6 6.8 3.5 8.1 0.5 6.1 4.1 4.4 -4.3 8.5
Consumer Durable Services -19.4 60.4 -17.8 91.9 -20.4 44.4 -13.9 38.4 -28.7 53.3
Table 2b (cont’d)
Growth Rates of Outputs and Inputs, United States (average annual percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Non-information Technology 3.0 2.9 5.0 3.3 1.9 2.7 2.0 2.1 1.7 3.4
Other Machinery and Equipment 4.6 1.9 6.3 1.4 3.6 2.2 4.3 1.5 2.8 3.1
Other Durables 2.1 4.3 4.0 5.2 1.0 3.9 1.4 2.8 0.4 5.3
Structures 2.9 2.5 5.0 3.0 1.7 2.2 1.5 2.0 2.0 2.6
Housing 3.2 2.5 7.2 2.8 0.9 2.4 1.4 2.2 0.3 2.7
Other 2.8 2.5 3.7 3.2 2.2 2.1 1.6 1.9 3.0 2.5

Labour Services 3.9 2.2 4.8 2.3 3.4 2.1 3.3 1.8 3.4 2.5
University-educated Workers 5.1 3.8 6.6 5.1 4.2 3.1 4.1 2.7 4.4 3.5
Non-university Educated Workers 3.4 1.4 4.2 1.3 2.9 1.6 2.9 1.3 2.9 1.9
Addendum
Hours at Work 1.9 2.0 1.8 1.4 2.3
Non-university-educated Workers 1.3 1.2 1.3 1.0 1.8
21
Figure 1a
Output Shares of Information Technology by Type, Canada

(percent of current dollar gross domestic product)
Chart 1a. Output Shares of Information technology by Type, Canada
______________________________________________________________________________
(Percent of Current Dollar GDP)
6.0
6.0
Communication
Communicationservices
Services
Computer
Computersandand
consumers'
Consumer durable services
Durable Services
Communication
Communicationinvestment
Investment
5.0
5.0 Software
Softwareinvestment
Investment
Computer
Computersinvestment
Investment
Computer
Computersandand
software consumption
Software Consumption
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
-
1981
1981 1983
1983 1985
1985 1987
1987 1989
1989 1991
1991 1993
1993 1995
1995 1997
1997 1999
1999
Figure 1b
Output Shares of Information Technology by Type, United States

(percent of current dollar gross domestic product)
______________________________________________________________________________
Chart 1b. Output Shares of Information Technology by Type, United States
(Percent of Current Dollar GDP)
8.0
8.0
Communication
Communication Services
services
7.0
7.0 Computer
Computersand and
consumers' durable
Consumer servicesServices
Durable
Communication
Communication investment
Investment
Software
Softwareinvestment
Investment
6.0
6.0 Computer
Computersinvestment
Investment
Computer
Computersand and
software consumption
Software Consumption
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
-0.0
1981
1981 1983
1983 1985 1987 1989
1989 1991
1991 1993 1995
1995 1997
1997 1999
1999
22
For our aggregate framework, we require an aggregate measure of capital ser-

vices across all types of reproducible fixed assets, consumer durable assets, in-
ventories, and land. We employ quantity indexes of these assets to generate
aggregate capital services, capital stock, and investment series.
The definition of capital includes all tangible assets in the Canadian and U.S.
private economies, equipment and structures, as well as consumer and govern-
ment durables, land, and inventories. For the purpose of this Canada-U.S. com-
parison, Canadian (U.S.) national accounts data were reclassified into 24 (52)
non-residential assets, 4 (5) residential assets, and 13 (13) consumer durable as-
sets. For each asset, we created an investment series in current and chained dol-
lars. Although the implicit prices of some assets, particularly those associated
with information technology, behave differently in the two countries, the differ-
ences do not impact significantly on the order of magnitude of the contributions
of information technology to output, capital inputs and productivity growth at
the aggregate level (see Harchaoui and Tarkhani, 2004a).
Capital stocks were then estimated using the perpetual inventory method and a
geometric depreciation rate. Canadian depreciation rates are estimated econo-
metrically using the age-price profile based on a sample of 30,000 observations of
non-residential used assets dating from 1987 to 1995 maintained by Statistics
Canada (Harchaoui and Tarkhani, 2003). The U.S. depreciation rates are based on
the Bureau of Economic Analysis (BEA) estimates constructed during the 1980s
(see Fraumeni, 1997), with the exception of automobiles, software and computers
derived by Dale Jorgenson and his associates (see Jorgenson and Stiroh, 2000,
p. 203).
Generally, for similar information technology assets, Canada’s depreciation rates

are higher that their U.S. counterparts. In a capital stock universe, this may lead
to a lower growth of capital stock for Canada, compared to the United States.
While depreciation rates are higher in Canada, information technology price
declines tend to be lower. In the capital services framework, for a given rate of
return, higher depreciation rates in favour of Canada are outweighed by more
rapid price declines for the United States, with the result that the two measure-
ment differences tend to cancel out. This implies that under the capital services
framework, cross country measurement differences may have a modest impact
on productivity performance.
23
Business information technology investments, as well as purchases of computers,

software, and communications equipment by households and governments,
have grown spectacularly in recent years, but remain relatively small (Table 1).
In Canada, the stocks of all information technology assets combined accounted for
only 3.0 percent of domestic tangible capital stock in 2000, up from 1.5 percent in
1981 (respectively 4.8 percent and 2.5 percent for the United States).
The capital service flows from durable goods employed by households and gov-
ernments enter measures of both output and input. A steadily rising proportion
of these service flows are associated with investments in information technology.
Investments in information technology by business, household, and government
sectors must be included in the GDP, along with household and government
information technology capital services, in order to capture the full impact of
information technology on the Canadian and U.S. private economies.
Figures 2a and 2b give the information technology capital service flows as a

share of gross domestic capital income. While information technology assets are
only 3.0 percent of total capital in 2000 (4.8 percent for the United States), these
figures show that the information technology service shares, or the cost of capital
shares, of these assets are twice as high as the corresponding asset shares. In
2000, it was 6.8 percent in Canada (10.4 percent for the United States), more than
double what it was in 1981 (respectively 3.1 percent and 4.3 percent for Canada
and the United States). This reflects the rapid price declines and high deprecia-
tion rates that enter into the rental prices for information technology.
Figures 2a and 2b also depict the rapid increase in the importance of information
technology services, reflecting the accelerating pace of information technology
price declines. During the 1995-2000 period, the capital service price for com-
puters fell 16.6 percent per year in Canada (21.5 percent for the United States),
compared to an increase of 39.5 percent in capital input for computers
(41.8 percent for the United States) (see Tables 2a and 2b). As a consequence, the
value of computer services grew substantially. However, the cost of capital share
of computers was only 2.5 percent of gross domestic income in 2000 in Canada
(2.7 percent for the United States), up from 1.6 percent in 1995 (2.1 percent for the
United States) (see Figures 2a and 2b).
24
Figure 2a
Input Shares of Information Technology by Type, Canada

(percent of current gross domestic capital income)
______________________________________________________________________________
3.0
3.0
Computers
Computers
2.5
2.5 Communication
Communication
Software
Software
Computer and
Computers andSoftware
software durableDurable
Consumer services
Services
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
1981
1981 1983
1983 1985
1985 1987
1987 1989
1989 1991
1991 1993
1993 1995
1995 1997
1997 1999
1999
Figure 2b
Input Shares of Information Technology by Type, United States

(percent of current gross domestic capital income)
______________________________________________________________________________
4.5
4.5
4.0
4.0 Computers
Computers
Communication
Communication
3.5 Software
Software
3.5 Computers and
Computer andSoftware
softwareConsumer
consumerDurable Services
durable services
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
1981
1981 1983
1983 1985
1985 1987
1987 1989
1989 1991
1991 1993
1993 1995
1995 1997
1997 1999
1999
25
The rapid accumulation of software is less affected by services price declines in

Canada than in the United States. In Canada, the price of software services fell
2.6 percent per year between 1995 and 2000, compared to 4.3 percent for the
United States (see Tables 2a and 2b). Nonetheless, Canadian businesses have
been accumulating software very rapidly, with real capital services growing
15.3 percent per year, significantly higher than the 8.5 percent increase per year
in the United States. A possible explanation is that Canadians responded to com-
puter price declines by investing more than their U.S. counterparts in comple-
mentary inputs like software. The services price decline of communication
equipment fell 2.3 percent in the United States, compared to a 1.8 percent in-
crease for Canada. As a result, the U.S. communication capital services grew
faster than its Canadian counterpart during the period 1995-2000.
Tables 2a and 2b also present estimates of the flow of information technology

capital services and corresponding price indexes for 1981-2000. Growth of infor-
mation technology capital services jumped from 12.6 percent per year between
1988 and 1995 to 25.1 percent between 1995 and 2000 for the U.S., while growth
of non-information technology capital services increased from 2.1 percent to
3.4 percent over the same period. This reverses the trend toward slower capital
growth through 1995. In contrast, between these two periods, Canada’s informa-
tion technology capital services increased moderately from 15.6 percent to
22.0 percent, compared to an increase from 1.1 to 1.8 percent for non-information
technology capital services over the same period.
Labour Services
This section presents estimates of university and non-university labour inputs for
both the Canadian and U.S. private economies from 1981 to 2000. The primary data
sources are the censuses of population (quinquennial for Canada and decennial for
the United States), annual surveys (Labour Force Survey for Canada and Current
Population Survey for the United States), the Canadian productivity accounts and
the NIPAs for the United States for total hours worked and labour compensation.
The censuses of population provide detailed data on employment, hours, and la-
bour compensation across demographic groups in census years. The annual survey
data are used to interpolate similar data for intervening years and the Canadian
productivity accounts and NIPA data provide control totals. The demographic
groups include 112 different types of workers, cross-classified by class (employee,
self-employed or unpaid), age (15-17, 18-24, 25-34, 35-44, 45-54, 55-64, 65+ years),
gender, and education attainment (university and non-university).11
26
Constant quality indexes for the price and quantity of labour input account for
the heterogeneity of the workforce across sex, employment class, age, and educa-
tion levels. This follows the approach of Jorgenson, Gollop, and Fraumeni (1987)
for the United States and Gu, Kaci, Maynard, and Sillamaa (2003) for Canada.
Table 2a and 2b present estimates of aggregate labour input by category of work-

ers. The growth rate of labour input for Canada accelerated to 3.8 percent for the
1995-2000 period (2.5 percent for the United States) from 1.2 percent for the 1988-
95 period (1.8 percent for the United States). This is primarily due to the growth
of hours worked, which rose in Canada from a growth rate of 0.3 percent for the
1988-95 period (1.4 percent for the United States) to 3.1 percent for the 1995-2000
period (2.3 percent for the United States), as labour force participation increased
and unemployment rates plummeted.
Figure 3 shows that the labour cost share of university-educated workers in the
gross domestic income in current prices was 5.3 percent in 1981 in Canada
(13.2 percent in the United States), but has risen fairly steadily since then until
Figure 3
Input Shares of University-educated Workers

(percent of current gross domestic income)
______________________________________________________________________________
25.0
20.0
15.0
10.0
5.0
0.0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
27
the early 1990s when it experienced a significant slowdown. During the second
half of the 1990s, this ratio experienced an unprecedented increase reaching
11.8 percent in 2000 (21.3 percent for the United States), more than double the
performance posted in 1981. Tables 2a and 2b show that the growth of univer-
sity-educated labour input significantly dominated that of non-university input
across all periods. The substitution of university-educated workers for non-
university workers has been an important force behind the restructuring of the
Canadian and U.S. private economies. This reflects the increased role of knowl-
edge workers associated by the deployment of information technology invest-
ment.
The Growth Resurgence Quantified
T HE CANADIAN AND U.S. PRIVATE ECONOMIES have both undergone a remark-

able resurgence since the mid-1990s with accelerating growth in output, mul-
tifactor productivity and labour productivity. This section quantifies the sources
of growth for the 1981-2000 period and various sub-periods. An important objec-
tive is to account for the sharp acceleration in the level of economic activity since
1995 and, in particular, to document the role of information technology.
Contributions of Information Technology
Private business investment predominates in the output of information technol-

ogy. Household purchases of information technology equipment and services are
next in importance. Government purchases of information technology equipment
and services, as well as net exports of information technology products, are also
included in order to provide a complete picture. Firms, consumers, governments,
and purchasers of Canadian exports have responded to relative price changes,
increasing the contributions of computers, software, and communications
equipment to GDP growth.
Tables 2a and 2b show that the price of computer investment in Canada fell by
16.7 percent per year, the price of software 1.0 percent, and the price of commu-
nications equipment 0.1 percent, and the price of information technology con-
sumer durable services 10.5 percent during the period 1995-2000 (respectively
22.1 percent, 1.0 percent, 2.2 percent and 28.7 percent for the United States), while
non-information technology prices rose 1.9 percent (1.7 percent for the United
States). In response to these price changes, firms, households, and governments
28
have accumulated computers, software, and communications equipment much

more rapidly than other forms of capital.
Figures 4a, 4b, 5a and 5b highlight the rising contributions of information tech-
nology outputs to Canadian and U.S. economic growth. Figures 4a and 4b show
the breakdown between information technology and non-information technol-
ogy outputs, while Figures 5a and 5b decompose the contribution of information
technology into its components.
Although the non-information segment remains the largest contributor to GDP

growth, Figures 4a and 4b show that the output contribution of information tech-
nology during the post-1995 period more than doubled (0.8 percentage points
compared to 0.3 percentage points in the 1980s; 1.4 percentage points up from
0.6 percentage points in the United States). Despite this increase, the bulk of GDP
growth in the late 1990s in both Canada and the United States was ascribed to
non-information technology (82 percent in Canada, compared to 71 percent in
the United States). Figures 5a and 5b show that computer investment is the larg-
est single information technology contributor in the late 1990s, but that invest-
ments in software and communications equipment have become increasingly
important.
Figures 6a, 6b, 7a and 7b present a similar decomposition of information technol-

ogy capital inputs. The contribution of these inputs to the growth of overall capi-
tal input has increased, albeit not to the same extent as that of information
technology to output growth. Figures 6a and 6b show that information technol-
ogy contribution to capital input has less than doubled in Canada between the
1980s and the late 1990s (from 0.8 percentage point to 1.3 percentage points). This
contrasts markedly with the United States, where information technology contri-
bution to capital input doubled during these two periods (2.4 percentage points,
compared to 1.2 percentage points). Figures 7a and 7b show that, as in the case of
the output, computers were the largest information technology contributor on
the capital input side, reflecting the growing share and accelerating growth rate
of computer investment in the late 1990s.
29
Figure 4a
Gross Domestic Product Contribution of Information Technology in the

Canadian Private Economy (average annual percentage rates of growth)
______________________________________________________________________________
5.0
4.5
4.0 Information Technology Non-information Technology
3.5
3.0
3.7
2.5
2.0
3.0
2.3
1.5 1.9
1.0
0.6
0.5
0.8
0.4 0.5
0.3 0.3
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Figure 4b
Gross Domestic Product Contribution of Information Technology in the

U.S. Private Economy (average annual percentage rates of growth)
______________________________________________________________________________
6.0
4.0
3.0 3.4
2.9 2.8
3.2
2.0
2.3
1.0
1.4
0.8 0.9
0.6 0.6
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
30
Figure 5a
Gross Domestic Product Contribution of Information Technology by Type in the

______________________________________________________________________________
1.0
Computers and Software Consumption Computers Investment
Software Investment Communication Investment
0.8 Consumer Durable Services Communication Services
Other Information Technology
0.6
0.4
0.2
0.0
-0.2
-0.4
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Figure 5b
Gross Domestic Product Contribution of Information Technology by Type in the

______________________________________________________________________________
1.6
Computers and Software Consumption Computers Investment

1.4 Software Investment Communication Investment
Consumer Durable Services Communication Services
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
31
Figure 6a
Capital Input Contribution of Information Technology in the

______________________________________________________________________________
4.0
3.0
2.5
2.9 1.6
2.0
1.9
1.3
1.5
1.1
1.0
1.3
0.5 0.9 1.0
0.8 0.8
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Figure 6b
Capital Input Contribution of Information Technology in the

______________________________________________________________________________
8.0
7.0
Information Technology Non-information Technology
6.0
5.0 4.9
4.0
3.7 3.6
3.0 3.9
2.7
2.0
2.4
1.0
1.4 1.6
1.1 1.0
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
32
Figure 7a
Capital Input Contribution of Information Technology by Type in the

______________________________________________________________________________
1.40
Computers and Software Consumer Durable Services 0.14

1.20 Software
Communication
Computers 0.28
1.00
0.12
0.11 0.12
0.80
0.25
0.10 0.11
0.22
0.60 0.17 0.10
0.08 0.23
0.04
0.40 0.09 0.78
0.50 0.52
0.46
0.20
0.33
0.00
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Figure 7b
Capital Input Contribution of Information Technology by Type in the

______________________________________________________________________________
3.00
Computers and Software Consumer Durable Services

2.50 Software
Communication
Computers
0.60
2.00
0.23
1.50
0.39
0.54
0.31
0.17 0.17
1.00 0.16
0.15 0.24
0.34 0.42
0.21 0.12
0.50 1.05
0.33
0.61 0.61 0.61
0.30
0.00
1981-2000 1981-88 1988-2000 1988-95 1995-2000
33
As indicated above, the structure of aggregate output has shifted toward infor-
mation technology and the capital deployed in the economy has moved rapidly
to information technology assets. Following these changes, the composition of
the workforce has evolved toward more university-educated workers. As the
unemployment rate fell in the late 1990s, workers with a wide variety of levels of
education and experience entered the ranks of the employed labour force. The
contribution of university-educated workers dominated the growth of labour
input in the United States during the period 1981-2000, even though these workers
are less numerous than non-university workers (Figures 8a and 8b and Table 1).
This contrasts markedly with Canada where the growth of labour input was
driven by non-university-educated workers. The contribution of university-
educated workers to the aggregate labour input increased between the 1980s and
the late 1990s in Canada but it declined in the United States, thereby reducing the
gap between the two countries in this area.
In both countries, university-educated workers have higher marginal products

on average, as can be seen in the college wage premium. In Canada, the wage
premium for university-educated workers was $13,067 in 1981, $18,395 in 1988,
$26,738 in 1995, and $31,806 in 2000 (in the United States, US$13,399 in 1981,
US$20,453 in 1988, US$27,086 in 1995, and US$33,426 in 2000). The number of
university-educated workers has been growing more rapidly than that of non-
university workers. The modest contribution of university-educated workers in
the labour input growth in Canada is partly explained by their small share in the
gross domestic income, compared to their U.S. counterpart.
A possible explanation of the important contribution of university-educated

workers (despite their small share) is that they are complementary to information
technology capital, so that the decline in the price of information technology
drives up the demand for both information technology capital and university-
educated workers.12 An alternative explanation is that productivity growth is
biased toward university-educated workers, making them relatively more pro-
ductive than non-university workers.
34
Figure 8a
Labour Input Contribution of University-educated Workers in the

______________________________________________________________________________
4.0
3.5 Non-university-educated Workers

University-educated Workers
3.0
2.3
2.5
2.0
1.3 1.8 1.09
1.5
1.0 0.20
1.5
1.1 1.2
0.5 1.0
0.8
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Figure 8b
Labour Input Contribution of University-educated Workers in the

______________________________________________________________________________
3.0
Non-university-educated Workers
University-educated Workers
2.5
2.0
0.9 1.2
1.0
1.0
1.5
0.8
1.0
1.5
1.2 1.3
0.5 1.1
0.9
0.0
1981-2000 1981-88 1988-2000 1988-95 1995-2000
35
Sources of Economic Growth
This section presents the sources of GDP growth for Canada and the United
States over the entire period 1981 to 2000 and its various sub-periods. The contri-
butions of capital inputs, labour inputs and multifactor productivity to GDP
growth are reported in Tables 3a and 3b. In Canada, capital services contributed
1.35 percentage points, labour services 1.12 percentage points, and multifactor
productivity growth 0.22 percentage points (for the United States, 1.81, 1.20 and
0.63 percentage points, respectively). Inputs growth was the source of 93 percent
of Canadian economic growth over the past two decades, while multifactor pro-
ductivity has accounted for 7 percent (17 percent for the United States).
A look at the Canadian economy before and after 1988 reveals some familiar fea-
tures of the historical record. After a strong output growth and a modest multifac-
tor productivity growth in the 1980s, the Canadian private economy slowed
markedly through the 1990s, with output growth falling from 3.24 percent to
2.37 percent while multifactor productivity growth deteriorated from 0.51 percent
to 0.06 percent. Growth in primary inputs also experienced a similar slowdown
from 1.52 percent to 1.26 percent for capital input and from 1.23 percent to
1.06 percent for labour input. In contrast, the moderate U.S. slowdown in the
growth of real GDP (from 3.76 percent to 3.70 percent) and primary inputs (from
3.19 percent to 3.04 percent) has resulted in improvements in multifactor produc-
tivity growth from 0.56 percent to 0.67 percent during the same period.
During the post-1995 period, labour input contributed 1.77 percentage points to
the growth resurgence in Canada, compared with 1.68 percentage points for
capital input. This contrasts with the United States where the contribution of
capital input was larger than that of labour input (2.66 percentage points com-
pared to 1.36 percentage points). Growth in hours worked accelerated as unem-
ployment fell to a 10-year low. Labour markets have tightened considerably,
even as labour force participation rates increased. University-educated workers
contributed about two-thirds of a percentage point to Canada’s GDP growth,
while non-university workers added slightly more than percentage point (for the
United States, 0.73 and 0.63 percentage points, respectively). Faster growth in mul-
tifactor productivity contributed the remaining 1.0 percentage points in Canada
(0.76 percentage points for the United States).
36
Table 3a
Sources of Gross Domestic Product Growth, Canada (average annual growth percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Outputs
Gross Domestic Product (GDP) 2.69 3.24 2.37 0.90 4.46
Contribution of Information Technology-GDP 0.43 0.30 0.51 0.31 0.79
Computer and Software Consumption 0.05 0.05 0.05 0.04 0.07
Computer Investment 0.25 0.24 0.26 0.16 0.40
Software Investment 0.14 0.11 0.16 0.12 0.20
Communication Investment 0.04 0.02 0.05 0.03 0.08

Consumer Durable Services 0.05 0.05 0.06 0.05 0.07
Communication Services 0.06 0.06 0.06 0.05 0.08
Other –0.17 –0.22 –0.14 –0.15 –0.12
Contribution of Non-information Technology-GDP 2.26 2.95 1.86 0.59 3.68
Housing Services 0.38 0.40 0.37 0.38 0.35
Housing Investment 0.10 0.35 –0.05 –0.24 0.24
Other 1.79 2.21 1.54 0.46 3.09
37
38

Table 3a (cont’d)
Sources of Gross Domestic Product Growth, Canada (average annual growth percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Inputs
Gross Domestic Income 2.47 2.74 2.31 1.51 3.45
Contribution of Capital Services 1.35 1.52 1.26 0.95 1.68
Contribution of Information Technology 0.44 0.31 0.54 0.39 0.75
Computers 0.24 0.19 0.28 0.17 0.44
Communication 0.04 0.02 0.05 0.04 0.07
Software 0.10 0.07 0.13 0.12 0.16
Contribution of Non-information Technology 0.91 1.20 0.72 0.56 0.94
Other Machinery and Equipment 0.16 0.11 0.21 0.09 0.37
Other Durables 0.10 0.25 –0.01 –0.10 0.13
Housing 0.39 0.58 0.25 0.36 0.07
Other 0.26 0.26 0.27 0.20 0.36
Contribution of Labour Services 1.12 1.23 1.06 0.56 1.77
Multifactor Productivity 0.22 0.51 0.06 –0.60 1.01
Notes: The contribution of an output or an input is the rate of growth multiplied by the value share.
Contributions are defined in equation (2) in the text.
Table 3b
Sources of Gross Domestic Product Growth, United States (average annual growth percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Outputs
Gross Domestic Product (GDP) 3.72 3.76 3.70 2.94 4.78
Contribution of Information Technology-GDP 0.82 0.60 0.95 0.61 1.42
Computers and Software Consumption 0.10 0.07 0.12 0.08 0.17
Computers Investment 0.26 0.23 0.27 0.18 0.41
Software Investment 0.17 0.12 0.20 0.14 0.28
Communication Investment 0.08 0.05 0.10 0.04 0.19

Communication Services 0.08 0.05 0.10 0.08 0.13
Other 0.00 0.00 0.00 0.00 0.00
Contribution of Non-information Technology-GDP 2.91 3.16 2.76 2.33 3.36
Housing Services 0.15 0.17 0.14 0.14 0.15
Housing Investment 0.17 0.30 0.09 0.01 0.20
Other 2.59 2.70 2.53 2.18 3.01
39
40

Table 3b (cont’d)
Sources of Gross Domestic Product Growth, United States (average annual growth percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

Inputs
Gross Domestic Income 3.09 3.19 3.04 2.34 4.02
Contribution of Capital Services 1.89 1.88 1.90 1.36 2.66
Contribution of Information Technology 0.53 0.43 0.58 0.37 0.88
Computers 0.23 0.23 0.23 0.11 0.38
Communication 0.13 0.08 0.15 0.12 0.20
Software 0.06 0.06 0.06 0.04 0.08
Contribution of Non-information Technology 1.37 1.46 1.32 0.99 1.78
Other Machinery and Equipment 0.56 0.49 0.60 0.39 0.89
Other Durables 0.36 0.45 0.31 0.24 0.42
Housing 0.24 0.25 0.23 0.21 0.27
Other 0.21 0.27 0.17 0.16 0.20
Contribution of Labour Services 1.20 1.31 1.14 0.98 1.36
Multifactor Productivity 0.63 0.56 0.67 0.60 0.76
Notes: The contribution of an output or an input is the rate of growth multiplied by the value share.
Contributions are defined in equation (2) in the text.
The contribution of capital input reflects the investment boom of the late 1990s as
businesses, households, and governments poured resources into plant and
equipment, especially computers, software, and communications equipment. The
contribution of information technology capital services has grown steadily
throughout the 1988-2000 period, a reflection of the impact of the accelerating
decline in information technology prices. The contribution of information tech-
nology capital services was accompanied by a strong contribution of university-
educated labour input.
After maintaining an average rate of 0.51 percent in Canada for the period 1981-
88, multifactor productivity growth fell to -0.6 percent for the 1988-95 period and
then vaulted to 1.01 percent per year for 1995-2000. This is a major source of
growth in output and labour productivity for the Canadian private economy.
While multifactor productivity growth for the 1995-2000 period is lower than the
rate of the sixties, the Canadian private economy is recuperating from the anemic
productivity growth of the past 15 years.
Results show that recent resurgence of the Canadian private economy has raised
the growth rate of real GDP by 3.56 percentage points when 1995-2000 is com-
pared to 1988-95 (1.84 percentage points in the United States). Capital input con-
tributed 0.73 percentage points to the post-1995 revival (1.30 percentage points
for the United States); about half of this contribution of capital input in Canada is
due to the surge of information technology capital input, while the other half is
due to a more rapid accumulation of non-information technology assets. This
contrasts with the United States where almost two-thirds of the increase in capi-
tal input between these two periods was attributable to non-information technol-
ogy (0.79 percentage points compared to 0.51 for information technology).
Labour input contributed 1.21 percentage points to the growth resurgence
(0.38 percentage points for the United States). University-educated workers con-
tributed slightly more than two-tenths of a percentage point, while non-
university workers added close to another percentage point to the growth resur-
gence. In the United States, university-educated workers have made a negative
contribution to overall labour input growth (-0.16 percentage points), compared
to a 0.54 percentage points increase for non-university-educated workers. Faster
growth in multifactor productivity in Canada contributed the remaining
1.61 percentage points (0.16 percentage points for the United States). 13
41
Sources of Labour Productivity Growth
Output growth is the sum of growth in hours worked and labour productivity.
Table 4 shows the breakdown between growth in hours and labour productivity
for the same periods as in the previous tables. For the period 1981-2000, labour
productivity growth in Canada has not predominated in output growth, increas-
ing just over 1.01 percent per year for this period, while hours increased about
1.64 percent per year. This contrasts with the United States where labour produc-
tivity was equally important as hours at work in the source of output growth,
accounting for 49 percent of the output growth (38 percent for Canada).
Labour productivity growth depends on capital deepening, labour quality

growth, and the growth of multifactor productivity. We have divided capital
deepening between information technology and non-information technology
capital inputs and labour quality among university-educated and non-university
workers and the reallocation of hours between these two categories of workers.
Table 4 reveals the well-known productivity slowdown of the early 1990s, com-
pared to the 1980s, but also emphasizes the acceleration in labour productivity
growth in the late 1990s. The slowdown through the early 1990s reflects primar-
ily reduced multifactor productivity growth in Canada (capital deepening in the
United States). The growth of labour productivity slipped in Canada during the
early 1990s with a slump in multifactor productivity (in Canada) and capital
deepening (in the United States) only partly offset by a revival in labour quality
growth. A slowdown in hours combined with slowing labour productivity
growth during 1988-95 gave rise to a further slide in the growth of output.
Accelerating output growth between the periods 1988-95 and 1995-2000 in Canada
reflects primarily growth in labour hours, vaulting from 0.28 percent to
3.11 percent (1.42 percent to 2.26 percent in the United States) and labour produc-
tivity, which increased from 0.62 percent to 1.31 percent during this period (from
1.51 percent to 2.46 percent in the United States). The sources of the productivity
revival are different in Canada and the United States. In Canada, multifactor
productivity contributed 1.01 percentage points (or 77 percent of labour produc-
tivity growth), offsetting the slump in both capital deepening and labour compo-
sition. In the United States, capital deepening and multifactor productivity
contributed, respectively, 1.57 and 0.76 percentage points, (accounting, respec-
tively, for 31 percent and 64 percent to labour productivity growth), largely off-
setting the labour quality slowdown. Reallocation of hours, a reflection of the shift
of the workforce toward more productive activities, has made an important contri-
bution.
42
Table 4
Sources of Labour Productivity Growth (average annual percentage rates of growth)
1981-2000 1981-88 1988-2000 1988-95 1995-2000

United United United United United
Canada States Canada States Canada States Canada States Canada States
Labour Productivity 1.03 1.83 1.25 1.70 0.91 1.90 0.62 1.51 1.31 2.46
Gross Domestic Product 2.69 3.72 3.24 3.76 2.37 3.70 0.90 2.94 4.46 4.78
Hours Worked 1.64 1.86 1.97 2.02 1.45 1.77 0.28 1.42 3.11 2.26
Contribution of Capital Deepening 0.47 1.04 0.46 0.98 0.47 1.08 0.79 0.72 0.03 1.57
Information Technology 0.34 0.42 0.19 0.34 0.52 0.46 0.39 0.29 –0.27 0.69

Non-information Technology 0.13 0.62 0.27 0.64 –0.05 0.62 0.40 0.43 0.29 0.88
Contribution of Labour Composition 0.34 0.16 0.28 0.16 0.38 0.16 0.44 0.19 0.28 0.13
University-educated Workers 0.03 –0.02 0.02 –0.05 0.04 –0.01 0.05 0.00 0.02 –0.01
Non-university-educated Workers 0.19 0.06 0.19 0.04 0.19 0.07 0.22 0.10 0.14 0.04
Reallocation of Hours 0.12 0.12 0.07 0.18 0.15 0.09 0.17 0.09 0.12 0.10
Multifactor Productivity 0.22 0.63 0.51 0.56 0.06 0.67 –0.60 0.60 1.01 0.76
Information Technology 0.07 0.33 0.06 0.28 0.07 0.35 0.04 0.22 0.11 0.54
Non-information Technology 0.13 0.30 0.35 0.28 0.00 0.32 –0.69 0.38 0.98 0.22
43
The Sectoral Sources of Multifactor Productivity Growth
Motivation
W e have explored the sources of the Canadian and the U.S. economic growth
at the aggregate level and demonstrated that accelerated multifactor pro-
ductivity growth is an important contributor to the recent growth resurgence—
particularly in Canada. We now turn our attention to industry data to trace the
contribution of information technology-producing industries to aggregate multi-
factor productivity growth. Before proceeding to the sectoral allocation of multi-
factor productivity gains, it is useful to note that Ho, Rao, and Tang, in this
volume, also examines sectoral allocations. It is important, however, to note that
there are differences in the coverage of information technology-producing indus-
tries, the domain of definition of the aggregate multifactor productivity growth
and the aggregation methodology.
First, Ho, Rao and Tang use the notion of business sector employed by the Cana-
dian productivity accounts and the BLS, a narrower coverage than the notion of
private economy employed in our study. In addition to the business sector, the
latter includes owner-occupied dwellings and the service flows of consumer
durables. Second, our method uses a top-down approach, compared to a bottom-
up approach in Ho, Rao and Tang. Third, information technology-producing
industries are defined to include two manufacturing industries that produce
information technology assets (computers, telecommunication equipment and
software) and semi-conductors: computers, and communications and electronic
equipment. In contrast, Ho, Rao and Tang add communication services to these
two manufacturing industries. Despite these differences, the same broad trends
emerge and therefore attest to the robustness of the findings.
Methodology and Data Sources
This section summarizes the methods for allocating the sources of aggregate
economic growth to the sectoral level. The first component consists of a produc-
tion function for each industry with gross output expressed as a function of capi-
tal, labour, intermediate inputs and the level of technology. The second is the
Domar methodology for aggregating over industries to obtain an aggregate
measure of productivity. The remainder of this section summarizes our method-
ology and the underlying data sources and discusses the results.
44
The conceptual distinction between industry and aggregate productivity indexes

has long been recognized. Domar (1961) developed an internally consistent link
by expressing the rate of aggregate multifactor productivity growth as a
weighted average of industry productivity growth rates, with weights equal to
the ratios of industry gross output to aggregate GDP. Domar weights have the
notable feature that they do not sum to unity. This reflects the different output
concepts used at the aggregate and industry levels. At the aggregate level, only
primary inputs are included, while both primary and intermediate inputs are
included in the industry production functions. For the same industry, gross out-
put exceeds value added, so the sum of gross output across industries exceeds
the sum of value added. This weighting methodology implies that the private
economy-wide multifactor productivity growth can grow faster than productiv-
ity in any industry, since productivity gains are magnified as they work their
way through the production process.
This internally consistent framework makes it possible to identify the role of in-
formation technology production as a source of productivity growth at the sectoral
level. Jorgenson, Gollop, and Fraumeni (1987) have employed Domar’s (1961)
model to trace aggregate productivity growth to its sources at the level of individ-
ual industries. More recently, Jorgenson and Stiroh (2000), and Jorgenson, Ho, and
Stiroh (forthcoming), for the United States, and Harchaoui and Tarkhani (2004a),
for a Canada-U.S. comparison, have used the same framework to quantify the
contribution of information technology-producing industries to the business sector
multifactor productivity revival.
Before turning to the results, a description of the data sources is in order. The pri-
mary source of information at the industry level is the KLEMS database for both
countries maintained, respectively, by the Canadian Productivity Accounts and
Dale Jorgenson and his associates. Both data sources employ similar concepts and
methods that accord with the OECD productivity manual (OECD 2001). These
data include series in chained constant dollars for output, capital, labour and in-
termediate inputs, along with the current dollar cost of each of these inputs. At the
industry level, computers and communications and electronic equipment consti-
tute the two manufacturing industries that make up the information technology-
producing industries for Canada and the United States. Although these two indus-
tries account for a small share in the aggregate GDP in both Canada and the
United States, they have experienced a rapid output growth over the last 20 years.
Before proceeding to the empirical results, we should point out two features of
the data employed in industry-level analysis. First, the Canadian Productivity
45
Account (CPA) series on gross output and intermediate inputs are usually
three years behind the reference year due to the long lag in obtaining detailed in-
ter-industry transactions from Statistics Canada input-output tables. To capture
most of the growth revival experienced by the Canadian business sector in the late
1990s, these series were updated on an experimental basis using synthetic input-
output tables for the post benchmark years. Despite the preliminary nature of the
projected series for the 1998-2000 period, their overall trend over the 1981-2000
period appears to be reasonable and consistent with other current series such as
investment or value added by industry.
Second, our estimates of capital services at the industry level are not directly
comparable to the aggregate series employed in the previous sections
of this study. In the first part of the study, we have used a production possibil-
ity frontier which requires an aggregate measure of capital services
( )
Kt = f ( K 1,t , K 2 ,t ,..., K n ,t ) , where n includes all types of reproducible fixed assets,
inventories and land. In this section, we assume the existence of a production
function at the industry level, which implies that capital services are aggregated
across assets and industries.
Empirical Results
Figures 9a and 9b report the contribution of information technology and non-

information technology industries to the aggregate multifactor productivity
growth in Canada and the United States. Canada’s information technology-
producing industries have consistently made a positive, albeit small, contribu-
tion to the aggregate productivity growth. Compared to the early 1980s, their
contribution during the second half of the 1990s almost doubled to reach
0.12 percentage points. In contrast, information technology-using industries have
generated the bulk of the aggregate multifactor productivity in Canada during
the early 1980s and late 1990s; but their contribution has been negative in the
early 1990s, thereby explaining, to a large extent, the fortunes of the aggregate
productivity performance in Canada during that period. While close to
80 percent of the multifactor productivity performance in Canada during the late
1990s was driven by information technology-using industries, the story is differ-
ent for the United States, where these industries have generally generated about
25 percent of the aggregate productivity gains. This result is consistent with the
one reported in Harchaoui and Tarkhani (2004a), based on a different methodol-
ogy from the one employed in this study.
46
Figure 9a
Sectoral Contributions of Information Technology to Canada’s

Multifactor Productivity Growth, Private Economy
(Average annual percentage rates of growth)
1.20
1.00 Information Technology-using Industries

Information Technology-producing Industries
0.80
0.60
0.89
0.40
0.44
0.20
0.16
0.06 0.06 0.07 0.12
0.00 0.03
0.01
-0.20
0.63
-0.40
-0.60
-0.80
Figure 9b
Sectoral Contributions of Information Technology to U.S.

Multifactor Productivity Growth, Private Economy
(average annual percentage rates of growth)
________________________________________________________________________
0.80
Information Technology-using Industries

0.70 InformationTechnology-producing Industries
0.22
0.60
0.50 0.30 0.32
0.28 0.38
0.40
0.30
0.54
0.20 0.33
0.35
0.28
0.10 0.22
0.00
1981-2000 1981-88 1988-2000 1988-95 1995-2000
47
The difference in the sectoral sources of multifactor productivity between Canada

and the United States may be the result of differences in the structure of the
economies and/or in the sources, concepts and methods that underlie the statis-
tical systems of the two countries. Differences in the measurement of information
technology prices has long been considered as the prime suspect of the Canada-
U.S. manufacturing sector’s productivity gap in the Canadian public policy de-
bate. As shown by Table 5, the price changes have significant impacts on the
productivity performance of information technology-producing industries. It is
therefore important to ascertain the extent to which these price differences ac-
count for the sectoral allocation of the multifactor productivity growth.
During the 1981-2000 period, the annual growth rate of computers and office
equipment industry’s output implicit prices declined by 12.7 percent in Canada,
slightly slower than the 14.5 percent drop for their U.S. counterparts. This contrasts
with the communication and electronic products industry which showed diverg-
ing trends between the two countries: a 0.9 percent increase for Canada, compared
Table 5
Output and Intermediate Inputs Implicit Prices of

(average annual growth rate in percent)
1981-2000 1995-2000
Canada
Output Computers and Office Equipment –12.7 –18.6
Communication and Electronic Products 0.9 –1.6
Information Technology-producing Industries –3.0 –6.0
Intermediate Computers and Office Equipment –9.4 –17.1
Inputs Communication and Electronic Products 2.1 0.7
United States
Output Computers and Office Equipment –14.5 –22.1
Communication and Electronic Products –6.1 –12.8
Intermediate Computers and Office Equipment –6.1 –11.9
Inputs Communication and Electronic Products –2.1 –7.0
48
to a 6.1 percent decline for the United States. The implicit prices for the interme-
diate inputs showed similar diverging trends for the communication and elec-
tronic products industry (a 2.1 percent increase for Canada, compared to a
2.1 percent decline for the United States), whereas those of the computers and of-
fice equipment industry declined faster in Canada compared to the United States
(9.4 percent and 6.1 percent, respectively). This discrepancy becomes wider in the
late 1990s, due to the relentless decline in the prices of information technology
output in the United States.
In order to make a rigorous comparison between the role of information technol-

ogy-producing industries in productivity performance in Canada and the United
States, we have introduced an internationally harmonized deflator for information
technology-producing industries’ output and intermediate inputs, based on the
implicit prices (adjusted for the exchange rate) from the U.S. KLEMS database. The
harmonized deflator drops much faster than the prices in the Canadian productiv-
ity accounts. We investigate how this affects our estimates.
With the harmonized price indexes, although multifactor productivity growth of

Canadian information technology-producing industries improved from
3.1 percent to 7.2 percent, it still shows a 1.7 percentage point gap in favour of
their U.S. counterparts. This gap reflects the joint effect of the exchange rate and
the differences in the structures of the information technology-producing indus-
tries between Canada and the United States. Although it is difficult to quantify
the impact of each of these effects, the importance of the difference in the struc-
tures cannot be negligible.
In both countries, multifactor productivity of computers and office equipment

grew at more than twice the rate of communication and electronic equipment.
However, the relative size of the two industries in the two countries showed
significant differences. In the late 1990s, the communication and electronic
equipment industry accounted for three-quarters of Canadian information tech-
nology-producing industries, up from 68.1 percent in 1981. This contrasts mark-
edly with the United States, where this industry is much smaller, accounting for
slightly more than one third of the information technology-producing industries
output in the late 1990s, down from 43.2 percent in 1981. Therefore, the least
performing information technology-producing industry has seen its relative
share increasing in Canada and vice versa in the United States. This suggests that
the role of economic structure in the Canada-U.S. multifactor productivity gap of
information technology-producing industries cannot be ruled out.
49
Figure 10
Sectoral Contributions of Information Technology to Canada

Multifactor Productivity Growth Using International Harmonized Prices,
Private Economy (average annual percentage rates of growth)
________________________________________________________________________
1.20
1.00 Information Technology-using Industries

0.80
0.70
0.60
0.40
0.40
0.20 0.16 0.31
0.11 0.19 0.11
0.00 0.06
0.14
-0.20
-0.40 0.72
-0.60
-0.80
-1.00
1981-2000 1981-88 1988-2000 1988-95 1995-2000
Despite this difference in the structure of the information technology-producing

industries, it is informative to examine how these harmonized price indexes af-
fect our results on the sectoral allocation of aggregate multifactor productivity
growth. Figure 10 shows that with the use of harmonized prices, the contribution
of information technology-producing industries to the Canadian productivity
revival almost tripled, averaging 0.31 percentage points during the post-1995
period. Despite this increase, the basic story remains unchanged—the bulk of the
Canadian multifactor productivity revival was attributable to information tech-
nology-using industries.
Concluding Remarks
T HIS STUDY HAS EMPLOYED NEW DATA on the sources of growth for the Canadian
and U.S. private economies over the period 1981-2000. There are several in-
novations implemented in this study.
First, our definition of the private economy is broader than the notion of business
sector employed in our previous work. In particular, we treat consumer durable
50
goods symmetrically with housing capital since both are essentially investment
goods that provide a flow of services over many periods.
Second, we made the distinction between university-educated workers and non-

university-educated workers to compare the role of knowledge workers and
information technology assets in the growth resurgence in Canada and the
United States.
Third, an important feature of the accounting framework is the explicit role of

intermediate inputs at the industry level. Price declines resulting from imported
information technology in Canada and improvements in semiconductor technol-
ogy in the United States are, to a large extent, reflected in the large contributions
of intermediate inputs of information technology-producing industries of these
two countries.
The results indicate that the mechanisms underlying the structural transforma-
tion of the Canadian and the U.S. private economies are readily apparent in the
data. The structure of aggregate GDP has been shifting toward information tech-
nology commodities. The capital deployed in the economy is moving rapidly
toward information technology assets. Finally, the composition of the work force
is evolving toward more university-educated workers as investments in higher
education continue to rise.
As an illustration, consider the increasing role that information technology

played as a source of economic growth. For the period 1981 to 1988, information
technology-GDP contributed less than one-tenth of one percent to Canada’s eco-
nomic growth (16 percent for the United States). Since 1995, however, the price of
information technology has fallen at historically unprecedented rates, and firms
and households have followed a basic principle of economics ― they have substi-
tuted towards relatively cheaper commodities. Since 1995, the price decline for
information technology has accelerated, reaching 4.3 percent per year from 1995
to 2000 (9 percent for the United States). In response, investment and consump-
tion in information technology have exploded and the growth contribution of
information technology-GDP almost doubled to 0.18 percentage points per year
in the late 1990s (0.30 percentage points for the United States). The larger share of
information technology in the United States, compared to Canada, accounts for
much of the difference in these contributions.
51
Next, consider the acceleration of labour productivity growth in the 1990s. After
a seven-year slowdown dating back to the early 1990s, Canada’s labour produc-
tivity grew 1.31 percent per year for the 1995-2000 period (2.46 for the United
States), a 0.69 percentage point faster than during the 1990-95 period (close to
1 percentage point for the United States). A detailed decomposition shows that
information technology capital deepening retarded labour productivity growth
in Canada (–0.27 percentage points) as a result of the remarkable increase in
hours at work, but added 0.69 percentage points to the U.S. labour productivity
growth. Non-information technology capital deepening has made a 0.29 percent-
age points contribution to labour productivity in Canada, compared to 0.88 per-
centage point for the United States.
Slowing labour quality growth retarded Canada’s labour productivity growth by

0.16 percentage points (0.06 percentage points for the United States), relative to
the early 1990s, a result of exhaustion of the pool of available workers. The con-
tribution of non-university-educated workers dominated that of university-
educated workers in both Canada and the United States. Reallocation of hours, a
reflection of the shift of the workforce toward more productive activities, has
also made an important contribution.
Faster multifactor productivity growth contributed an additional 1 percentage

point in Canada (0.76 percentage points in the United States), largely reflecting
different sectoral sources of technical change resulting from the acceleration in
the information technology price decline. A closer look at the data showed that
gains in U.S. multifactor productivity growth can be traced, in substantial part, to
information technology-producing industries, which produce computers, semi-
conductors, and other high-tech gear. The evidence is equally clear that informa-
tion technology-using industries like finance, insurance, and real estate, and
distributive trade industries have been the source of Canada’s multifactor pro-
ductivity revival.
Endnotes
1 See Jorgenson and Stiroh (2000), Jorgenson (2001), Jorgenson, Ho, and Stiroh
(forthcoming), as well as Baily (2002), Congressional Budget Office (2002), Coun-
cil of Economic Advisors (2002), Gordon (2002), McKinsey Global Institute
(2001), Oliner and Sichel (2000, 2002), and Whelan (2002).
52
2 See Harchaoui, Tarkhani, Jackson and Armstrong (2002) and Harchaoui and
Tarkhani (2004a).
3 See Baldwin and Harchaoui (2003).
4 Our previous studies employed official U.S. data from the U.S. Bureau of Labor
Statistics (BLS). In the present study, we use Dale Jorgenson’s KLEMS database, a
data source that is not directly comparable to its official U.S. counterpart from the
BLS. The former uses the notion of gross output (sectoral output for the BLS) and
labour input (hours at work for the BLS) at the industry level. Owner-occupied
dwellings and the service flows of durables are in scope in Jorgenson’s data but out
of BLS scope.
5 In the system of national accounts, capital formation is confined to institutional

units in their capacity as producers. Thus, there is no gross fixed capital formation
of households, unless they are producers. One consequence is that persons who
own the dwellings in which they live are treated as unincorporated enterprises that
produce housing services that are consumed by the household to which the owner
belongs. This activity is excluded from the coverage of the Canadian productivity
accounts and the U.S. official productivity program, maintained by the U.S. BLS.
Similarly, the imputed income generated by the fictitious unincorporated enter-
prises is also excluded from the production side of the productivity accounts.
6 Under the existing practice, personal expenditure is not a true measure of con-
sumption. Under the existing conventions, purchases of consumer durables are ex-
pensed in the period when transactions occur. Since durable goods have a service
life of more than one year, this treatment fails to capture the service flow from the
stock of durables throughout their length of life, thereby making the conventions
for the measurement of consumer durables not symmetrical with those of housing.
This is by no means the first time that Statistics Canada has explored the construc-
tion of estimates for the flow of services for consumer durables. See Johal (1992).
7 See Katz and Peskin (1980) and the references therein. Katz and Peskin derived
experimental estimates of consumer durables flow of services for the United States.
A similar work for Canada was performed by Johal (1992).
8 Note that our output and capital services flow concepts include the service flows
from residential structures and consumer durables.
9 See Harchaoui and Tarkhani (2004b) for a description of the methodology.
10 At the time this study was written, Statistics Canada has not introduced capitalized
software expenditures in the data prior to 1981.
11 In Canada and the United States, university labour input comprises all employees
with a B.A. and above.
53
12 Gu and Wang in this volume found that Canadian industries that are both infor-
mation technology intensive and skill intensive had larger productivity gains in the
post-1995 period. This finding tends to support the complementarity explanation
between skilled workers and information technology capital.
13 These results are generally consistent with those of Ho, Rao and Tang in this vol-
ume who also found that Canada has experienced a more rapid surge in economic
growth and labour input growth than the United States.
Acknowledgments
A N EARLIER VERSION OF THIS STUDY was presented at the 37th Canadian Eco-
nomic Association meeting in Ottawa, May 2003. We thank John Baldwin,
Michael Denny, Erwin Diewert, Pierre Duguay, Alice Nakamura and the audi-
ence for their comments and suggestions. We are grateful to Wulong Gu for the
production of the Canadian labour input series, Weimin Wang for the produc-
tion of the Canadian gross output and intermediate input series for the post-
benchmark years, and Dale Jorgenson for providing his KLEMS database. This
study used the September 2002 vintage of the Canada-U.S. data which have been
subsequently revised. Despite significant revisions for GDP growth (upward for
Canada and downward for the United States), the story laid out in this study
remains unchanged.
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56
Information Technology and Productivity Growth: 3
Evidence from Canadian Industries
Wulong Gu & Weimin Wang
Abstract
L ABOUR PRODUCTIVITY GROWTH ACCELERATED in the Canadian business sector

after 1995. Our analysis shows that the rise in multi-factor productivity
(MFP) growth was the main contributing factor. Information technologies (IT)
made little direct contribution to the labour productivity growth revival through
capital deepening. However, our results show that IT use is linked to the MFP
growth acceleration through IT-induced organizational innovation and network
or spillover effects. Our results also show that the industries with larger shares of
knowledge workers are more likely to benefit from IT. There is some evidence to
suggest that manufacturing industries that are more open to international trade
have larger productivity gains from IT.
Introduction
P RODUCTIVITY GROWTH ACCELERATED in the Canadian business sector in the

second half of the 1990s. This pick-up occurred somewhat later in Canada than
in the United States (Robidoux and Wong, 2003; Faruqui, Gu, Kaci,
Laroche, and Maynard, 2003; Armstrong, Harchaoui, Jackson, and Tarkhani, 2002;
Crawford, 2002). Between the 1988-95 and 1995-2000 periods, annual labour pro-
ductivity growth in the Canadian business sector rose from 1.56 percent to 1.91
percent. Annual multifactor productivity growth increased from 0.57 percent to
1.06 percent. The objective of this study is to examine the sources of the productiv-
ity growth revival in the Canadian business sector. In particular, we will examine
the issue of whether this productivity growth revival is linked to the use of in-
formation technologies (IT).
A large number of studies in the United States conclude that the productivity
growth revival in the United States is due to IT production and IT use (Jorgenson,
Ho, and Stiroh, 2002; Pilat and Lee, 2001). A number of studies in Canada find that
57
Gu & Wang
the pickup in productivity growth in Canada is due to the increase in productivity

growth in the service sectors such as wholesale and retail trade, and communica-
tion services (Faruqui, et al, 2003; Rao and Tang, 2001). As the services sector has
invested heavily in IT during the 1990s, these studies infer that the productivity
growth pickup is linked to IT in Canada as is the case for the United States
(Colecchia and Schreyer, 2002) .
Most existing studies have focused on the contribution of IT use and IT produc-
tion to productivity growth in Canada and the United States. The use of IT con-
tributes to labour productivity growth through capital deepening as industries
increased their investments in IT.1 The production of IT contributes to labour
productivity growth through rapid technological progress and strong multifactor
productivity growth in IT-producing industries.
A number of recent papers in the United States have begun to examine a related
question: Is IT use linked to strong multifactor productivity growth during the
second half of the 1990s (Stiroh, 2002a; Basu, Fernald, Oulton, and Srinivasan,
2003)? These studies have identified two potential links between IT and multifac-
tor productivity growth: IT-induced organizational innovations and network or
spillover effects. First, firm-level studies suggest that to benefit from investment in
IT, firms must change their workplace and organizational practices (Brynjolfsson
and Hitt, 2000; Gera and Gu, forthcoming). These organizational changes include
the restructuring of the production process, management systems and employee
involvement schemes, and external reorganization emphasizing customer orien-
tation, outsourcing, firm networks and other collaborative arrangements (OECD,
2003). As a result of organizational changes, investment in IT improves produc-
tion efficiencies of the firms using IT and thus leads to multifactor productivity
growth.
Second, IT could be linked to multifactor productivity growth through network

or spillover effects. The OECD (2003) argues that the emergence of the Internet in
the mid-1990s has expanded the effectiveness of IT and improved communica-
tions between producers as well as between producers and consumers. In addi-
tion, IT have allowed new businesses and markets to flourish rapidly in areas of
new economy.
In this study, we make a number of contributions. First, we examine the issue of

whether IT is linked to strong MFP growth in Canada through IT-induced organ-
izational innovation and network or spillover effects. None of the existing studies
for Canada has examined this issue. Second, we use data for 122 industries
58
Information Technology and Productivity Growth
— the most detailed industry aggregation that is available for productivity analy-
sis — to examine the relationship between IT and productivity growth. Previous
studies are restricted to a much broader industry aggregation (e.g. two-digit
manufacturing plus one-digit non-manufacturing industries). Third, we examine
the hypothesis that human capital and IT are complementary in improving pro-
ductivity performance in Canadian industries. We also examine the hypothesis
that industries that are more open to international competition benefit more from
IT investments. It has been argued that to realize potential productivity gains
from IT, human capital and competitive pressures are essential.
The rest of the study is organized as follows. In the next section, we provide a
brief description of our data sources. In the third section, we examine the sources
of output and labour productivity for the Canadian business sector. The fourth
section addresses the issue of whether IT is linked to the post-1995 MFP growth
acceleration in the business sector. In the fifth section, we ask the question: Do
industries that have a larger share of knowledge workers and are more open to
international competition benefit more from IT? The last section concludes the
study.
Data Sources
D ATA FOR OUR STUDY ARE OBTAINED from Statistics Canada’s multifactor pro-
ductivity database, which provides statistics on gross output, intermediate
inputs, capital services and labour services for 122 individual industries of the
Canadian business sector. Gross output and intermediate inputs in the database
are constructed from Statistics Canada annual input-output tables. The measures
of capital services and labour services recognize differences in the contributions
of workers and capital to output and productivity. Labour input estimates reflect
the compositional changes of workers with different educational attainment and
experience (for details, see Gu, Kaci, Maynard, and Sillamaa, 2003). Capital input
estimates are constructed from data on 28 producible assets plus land and inven-
tories (for details, see Harchaoui and Tarkhani, 2003; and Gellatly, Tanguay, and
Yan, 2003). Consequently, the capital input estimates account for substitution
between these various assets. For the purpose of this study, capital input is di-
vided into IT and non-IT capital, and labour input into labour input from univer-
sity-educated workers and from non university-educated workers.
It should be noted that the gross output and intermediate inputs for the 1998-
2000 period are estimated from preliminary input-output tables for the period.2
59
Gu & Wang
Statistics Canada uses the North American Industry Classification (NAICS) for
the construction of input-output tables for the year 1997 onward. For the purpose
of this project, we have constructed annual input-output tables based on the 1980
Standard Industrial Classification (SIC) for the years 1998, 1999 and 2000. These
SIC-based input-output tables provide a time series of industry productivity at
the P-level of industry classification) over the period 1981-2000.
Output and Productivity Growth for the Business Sector
I N THIS SECTION, WE EXAMINE THE SOURCES of value-added and labour productivity

growth for the total business sector. From a traditional growth accounting
technique, the growth in value added can be decomposed into three main
sources: contribution of capital input, contribution of labour input, and multi-
factor productivity growth. For the purpose of this study, we further allocate the
contribution of capital input between IT and non-IT capital inputs. We also allo-
cate the contribution of labour input between university and non-university la-
bour input in order to examine the importance of educational attainment and
human capital for economic growth.
The growth accounting technique decomposes value-added growth for the busi-
ness sector as follows:
∆ ln V ≡ v IT ∆ ln K IT + v NIT ∆ ln K NIT
(1)
+ v U ∆ ln LU + v NU ∆ ln LNU + MFP
where V is value added for the business sector, K IT is the flow of capital services
from investment in IT, K NIT is the flow of capital services from non-IT capital ser-
vices, LU is labour input from university-educated workers, LNU is labour input
from non-university-educated workers, v is the share of an input in aggregate
nominal value added, averaged over two periods.
Subtracting changes in hours worked ∆ ln H from both sides of Equation (1), we

have the decomposition equation for aggregate labour productivity growth (ALP):
∆ ln(V / H ) ≡ v IT ∆ ln(K IT / H ) + v NIT ∆ ln(K NIT / H )

(2) + v U ⎡⎣ ∆ ln QU + ∆ ln ( H U H ) ⎤⎦
+ v NU ⎡⎣ ∆ ln Q NU + ∆ ln ( H NU H ) ⎤⎦ + MFP
60
Aggregate labour productivity growth in Equation (2) is decomposed into con-

tributions from IT capital deepening, non-IT capital deepening and labour com-
position (or labour quality), and MFP growth. The contribution of labour compo-
sition to aggregate labour productivity growth is further decomposed into con-
tributions from university and non-university workers and compositional shifts
between university and non-university workers,
v U ∆ ln ( H U H ) + v NU ∆ ln ( H NU H ) .
Table 1 summarizes the results of a growth accounting decomposition for value-

added growth in the Canadian business sector. The decomposition is based on
annual observations for the period 1981-2000, as well as sub-periods 1981-88,
1988-95 and 1995-2000. Our choice of the periods for the analysis is based on a
number of considerations. The year 1981 is the first year for which Canada’s in-
dustry output series are comparable to the United States. The year 1988 is ap-
proximately the end of the productivity growth cycle during the 1980s in Canada,
and 1995 represents the year when the productivity growth revival in Canada
started.
Results in Table 1 show that value added rose at an annual rate of 3.18 percent per
year in the business sector during the period 1981-2000. Labour input contributed
1.35 percentage points. Capital input contributed 1.19 percentage points. The re-
maining 0.64 percentage points were due to MFP growth. Over the period 1981-
2000, university-educated workers were as significant as non-university-
educated workers in their contribution to the value-added growth of the business
sector, even though university-educated workers only accounted for about
12 percent of hours worked. Similarly, IT capital services made a significant con-
tribution to the growth in aggregate value-added despite their relatively small share
in total capital services. The importance of university-educated workers and IT
capital services reflect the fact that they tend to have higher marginal products
than non-university-educated workers and non-IT capital services.
61
Gu & Wang
Table 1
Sources of Value Added Growth in the Business Sector, 1981-2000

(percentage points per year)
1981-2000 1981-88 1988-95 1995-2000

(1) (2) (3) (4) (4) – (3)
Value Added 3.18 3.27 1.84 4.98 3.14
Contribution of Capital
1.19 1.14 0.75 1.64 0.89
Input
IT 0.44 0.36 0.34 0.58 0.24
Non-IT 0.75 0.78 0.41 1.06 0.65
Contribution of Labour
1.35 1.42 0.52 2.28 1.76
Input
University 0.60 0.44 0.50 0.86 0.36
Non-university 0.75 0.98 0.02 1.42 1.40
Aggregate MFP 0.64 0.72 0.57 1.06 0.49
The value-added growth showed a large increase in the business sector during the
second half of the 1990s. Our results in Table 1 show that annual value-added
growth rose from 1.84 to 4.98 percent between the periods 1988-95 and 1995-2000.
This represents a 3.14 percentage-point increase during these two periods. About
half of the output growth revival was due to an increased contribution from la-
bour input, and mostly from non-university-educated workers. Capital deepen-
ing from both IT and non-IT was next in importance as a source of output growth
revival, contributing 0.89 percentage points. MFP growth was also an important
source of the growth acceleration in the Canadian business sector, contributing
0.49 percentage points.
In Table 2, we use equation (2) to decompose aggregate labour productivity

growth into three sources: capital deepening, labour quality and MFP growth.
Our decomposition results show that three sources made similar contributions to
labour productivity growth in the business sector during the period 1981-2000.
During that period, labour productivity rose by 1.55 percent per year. Capital
deepening contributed 0.54 percentage points. Shifts in labour composition to-
ward more educated and more experienced workers or labour composition con-
tributed 0.37 percentage points. MFP growth accounted for 0.64 percentage
points.
62
Table 2
Sources of Labour Productivity Growth in the Business Sector, 1981-2000

(percentage points per year)
1981-2000 1981-88 1988-95 1995-2000

(1) (2) (3) (4) (4) – (3)
ALP Growth 1.55 1.32 1.56 1.91 0.35
Contribution of Capital
0.54 0.38 0.64 0.40 –0.24
Deepening
IT 0.39 0.32 0.33 0.48 0.15
Non-IT 0.15 0.06 0.31 –0.08 –0.38
Contribution of Labour
0.37 0.23 0.35 0.45 0.10
Quality
University 0.02 0.00 0.02 0.06 0.03
Non-university 0.19 0.15 0.17 0.24 0.07
Reallocation of Hours 0.15 0.08 0.16 0.16 0.00
Aggregate MFP 0.64 0.72 0.57 1.06 0.49
When we allocate the contribution of capital deepening to labour productivity

growth between IT and non-IT capital services, we find that IT-capital deepening
was more important than non-IT-capital deepening for labour productivity
growth in the business sector. We also find that the importance of IT capital for
productivity growth increased over the 1981-2000 period. For the 1995-2000 pe-
riod, all of the productivity contribution from capital deepening was due to IT
capital services. The contribution from non-IT capital-deepening was very small
for that period.
The revival in output growth of the Canadian business sector in the period 1995-
2000 reflects a dramatic increase in hours growth of 2.64 percentage points and a
rise in labour productivity growth of 0.76 percentage points. Our decomposition
results in Table 2 show that the post-1995 increase in labour productivity growth is
entirely due to acceleration in MFP growth. Capital deepening made a small nega-
tive contribution to the labour productivity growth revival, which was partially
offset by the positive contribution of labour composition.
While overall capital deepening slowed for the business sector after 1995, capital
deepening from IT increased, making a positive though small contribution to the
post-1995 increase in labour productivity growth in Canada.
63
Gu & Wang
Is the Productivity Growth Revival Linked to IT?
I N THIS SECTION, we ask whether the post-1995 MFP growth acceleration of the
Canadian business sector is linked to IT use. We proceed in a number of steps.
First, we ask how widespread the productivity growth revival is across Canadian
industries. If the post-1995 pickup in productivity growth is concentrated in a
few industries, IT use is unlikely to constitute the main factor behind the produc-
tivity acceleration in the Canadian business sector. During the 1990s, most Cana-
dian industries have increased IT investments as a result of rapid technical pro-
gress in IT production and sharp declines in IT investment goods. If IT use is
behind the productivity growth acceleration, the acceleration should have oc-
curred in most Canadian industries.
Second, we consider aggregation over industries. In a growth accounting frame-

work, MFP growth in the business sector can be traced to contributions from indi-
vidual industries. If IT use is linked to the productivity growth revival, most MFP
growth revival for the business sector should come from IT-intensive industries.
Third, we use regression analysis to examine the issue of whether IT use is linked
to the productivity acceleration. If IT were the driving force behind the MFP re-
vival, the post-1995 productivity acceleration should be positively related to IT use.
Is the Productivity Acceleration Widespread?
We have constructed MFP growth for 122 individual industries of the Canadian
business sector over the period 1981-2000. The MFP growth of an industry is calcu-
lated as the difference between gross output growth and a share-weighted sum of
input growth for capital service, labour service and intermediate inputs
(Jorgenson, Ho, and Stiroh, 2002).
Table 3 presents summary statistics regarding MFP and ALP growth for the pe-
riod 1995-2000 compared to the period 1988-95. Our results in Table 3 show that
MFP growth increased in 62 of the 122 industries between the 1988-95 and 1995-
2000 periods. These industries include large service industries such as wholesale,
retail, communication services and financial services (see Table A1 in the appen-
dix). As such, the industries with accelerating MFP growth accounted for the
majority of gross output and hours worked (76.8 percent of total hours and
67.0 percent of gross output in 1995). We conclude that the post-1995 productiv-
ity growth acceleration has been pervasive across Canadian industries.
64
Table 3
Summary Statistics for Post-1995 Changes in Productivity Growth at

Individual Industries
Number of Hours Share Output

Industries (%), 1995 Share(%), 1995
Increase in ALP Growth 63 70.7 57.8
Increase in MFP Growth 62 76.8 67.0
Increase in both ALP and
49 63.7 51.9
MFP Growth
Increase in ALP Growth,
14 9.0 6.0
but not in MFP Growth
Increase in MFP Growth,
13 13.2 15.1
but not in ALP Growth
Note: The total number of industries is 122.
While the productivity growth revival is pervasive across industries, an issue

remains as to whether the revival is statistically significant. To address the issue,
we use a simple test of changes in mean growth rates across industries.
(3) ∆ ln Ai ,t = α + β D + εi ,t , with D = 1 if t > 1995, D = 0 otherwise
where ∆lnAi,t is annual MFP growth for industry i, t is either years 1981 to 2000
or years 1988 to 2000. The coefficient α shows the mean MFP growth prior to
1995, and β the mean change in MFP growth in the 1995-2000 period compared
to either 1981-95 or 1988-95 period.
To ensure the estimated coefficients mirror the aggregate productivity trend, we

have estimated Equation (3) using a weighted least square regression. Nominal
output was used as weights for the MFP growth regression. Our regression results
show a large and statistically significant increase in MFP growth across Canadian
industries after 1995. Between the 1988-95 and 1995-2000 periods, MFP growth
increased by about 0.3 percentage points per year. The increase is statistically
significant at the 5 percent level.
65
Gu & Wang
Aggregation over Industries
Our growth decomposition shows that the post-1995 acceleration in labour pro-
ductivity growth for the business sector is almost entirely attributed to the accel-
eration in MFP growth. IT capital deepening made little contribution to this rise
in labour productivity growth.
While IT capital accumulation was not directly responsible for the recent pickup
in labour productivity growth in Canada, it has been suggested that IT may be
linked to MFP growth through organizational innovation and spillover or net-
work effects (Gera, Gu, and Lee, 1999; OECD, 2003). IT has allowed firms to
adopt more efficient work organization, and improve communication between
producers and consumers. This new technology has allowed new businesses and
markets to flourish. In addition, IT industries develop, deliver and support
products and services at the heart of the technology revolution (Beckstead and
Gellatly, 2003). The OECD (2003, p.16) concludes that these additional gains has
been important for Australia, Canada and the United States.
Our finding that MFP growth acceleration is pervasive across industries suggests
that IT could be an important force behind the MFP growth. In this section, we
use the growth accounting technique to examine the contribution of IT-intensive
industries to increases in aggregate MFP growth in the 1990s. If IT has a positive
effect on MFP growth, most MFP growth acceleration in the Canadian business
sector should come from those industries that have invested heavily in IT.
Table 4
Tests of Post-1995 Acceleration of Industry MFP Growth

Dependent Variable: Annual MFP Growth
1988-2000 1981-2000
0.226** 0.274***
Constant — —
(2.41) (3.81)
0.309** 0.286** 0.262* 0.254*
Post-1995 Dummy
(2.13) (2.03) (1.87) (1.86)
Industry Fixed Effects No Yes No Yes
Note: The coefficient estimates are based on a weighted least square regression nominal output
as weights. t-statistics are in parentheses. One asterisk denotes statistical significance at the
10-percent level, two asterisks denote the 5-percent level, and three asterisks the 1-percent
level.
66
In a growth accounting framework, aggregate MFP growth can be expressed as a

weighted sum of industry MFP growth using Domar weights plus terms reflect-
ing the reallocations of resources across industries. The Domar weight in the
framework is defined as the ratio of industry gross output to aggregate value
added in nominal dollars. We have applied this Domar aggregation to examine the sources
of aggregate MFP growth in Canada. The results are shown in Table 5.
In Table 5, we have divided industries into those that are IT-intensive and non-
IT-intensive, using the IT share of capital services in 1995. These two groups are
defined such that each accounted for about half of the aggregate output for the
period 1988-95. There are a total of 33 IT-intensive industries, and the remaining
89 industries are classified as non-IT-intensive. Table A1 in the Appendix pro-
vides a list of the 33 IT-intensive industries. Most IT service industries such as
wholesale and retail trade, financial services and communication services are
classified as IT-intensive industries.
Our results show that IT-intensive industries made little contribution to MFP
growth before 1995. Almost all MFP growth of the business sector can be attrib-
uted to non-IT-intensive industries for the period 1981-95. However, after 1995,
IT-intensive industries were a much more important source of aggregate MFP
growth than non-IT-intensive industries. For the period 1995-2000, IT-intensive
industries contributed 0.71 percentage points or 66 percent of the aggregate MFP
growth.
Table 5
Sources of MFP Growth in the Business Sector
1981-2000 1981-88 1988-95 1995-2000

(1) (2) (3) (4) (4) – (3)
Aggregate MFP Growth 0.64 0.72 0.57 1.06 0.49
Domar-weighted MFP 0.65 0.72 0.57 1.06 0.49

IT Intensive 0.13 –0.01 0.05 0.71 0.66
Non-IT Intensive 0.52 0.72 0.52 0.34 –0.18
Reallocation of
0.00 0.00 0.00 0.00 0.01
Capital and Labour
67
Gu & Wang
Table 6
Top 10 Contributors to the Post-1995 MFP Growth Revival in the

Business Sector
SIC 1980 Industries IT Share

113 Retail Trade Industries 0.22
98 Construction 0.16
117 Other Business Services Industries 0.14
67 Motor Vehicle Industry 0.10
114 Finance and Real Estate Industries 0.10
109 Electric Power Systems Industry 0.08
120 Accommodation and Food Services Industries 0.07
107 Telecommunication Carriers Industries 0.06
Membership Organisation (excluding religious)
123 0.05
& Other Service Industries
121 Amusement and Recreational Services 0.05
Annual MFP growth of the business sector rose by 0.49 percentage points in the
period 1995-2000 relative to 1988-95. Our results show that all of this acceleration is
due to the increased MFP growth in IT-intensive industries. As shown in Table 6,
8 of the top 10 contributors to the post-1995 rise in MFP growth are IT-intensive
services industries.3 None of these industries are manufacturing industries that
produce IT. This provides evidence in support of the view that IT use has raised
MFP growth of the Canadian business sector
The Link Between IT and the Productivity Revival Across Industries
In this section, we address the issue of whether the aggregate MFP growth re-
vival is linked to IT use by examining cross-industry relationship between IT use
and MFP growth. If IT is a main factor for faster productivity growth, the indus-
tries that are more IT intensive should have larger gains in productivity growth.
Table 7 presents average MFP growth for IT- and non-IT-intensive industries.
During the period 1988-95, IT-intensive industries have slower MFP growth than
non-IT-intensive industries. This suggests that IT made little contribution to pro-
ductivity growth in the Canadian business sector before the mid-1990s. After 1995,
68
Table 7
Productivity Growth by IT Intensity
Share of Share of MFP ALP

Hours Output Growth Growth
1988-1995
IT Intensive 0.63 0.49 0.05 1.24
Non-IT Intensive 0.37 0.51 0.52 1.92
1995-2000
IT Intensive 0.66 0.52 0.69 2.65
Non-IT Intensive 0.34 0.48 0.36 1.81
1995-2000 less 1988-1995
IT Intensive 0.03 0.03 0.63 1.41
Non-IT Intensive –0.03 -0.03 –0.16 –0.11
Note: Average MFP growth is calculated as a weighted average of MFP growth using nominal
gross output as weights. Average ALP growth uses hours worked as weights.
this so-called Solow productivity paradox disappeared in the Canadian business

sector. IT-intensive industries have faster MFP growth than non-IT-intensive
industries. Between the 1988-95 and 1995-2000 periods, IT-intensive industries
showed large gains in MFP growth. In contrast, non-IT-intensive industries
showed a slight decline.
We have estimated the correlation between changes in MFP growth during the
1988-95 and 1995-2000 periods across industries against IT share in 1995. We find
that there is a positive and statistically significant relationship between MFP
growth changes and IT share of capital services across Canadian industries. That
is, industries that are more IT intensive had larger increases in MFP growth be-
tween these two periods.
While raw correlations are suggestive of a positive relationship between IT and

MFP growth, more rigorous evidence can be provided using the following re-
gression equation:
∆ ln Ai ,t = α + β D + γ IT95 + η D ⋅ IT95 + ε i ,t ,
(4)
with D = 1 if t > 1995, D = 0 otherwise
69
Gu & Wang
where ∆lnAi,t is annual MFP growth for industry i, IT95 is IT share of capital ser-
vice in 1995, the coefficient γ shows the relationship between IT and productivity
growth before 1995, the coefficient η measures the association between IT and
post-1995 changes in MFP growth.
The results, shown in Table 8, show there is a positive and statistically significant
relationship between IT and productivity growth acceleration across industries. The
effects are quite large. Our estimates show that a 0.1 percentage-point increase in IT
capital share is associated with a 0.4 percentage-point acceleration in annual MFP
growth after 1995. This supports the view that the industries that purchased
more IT experienced larger productivity gains later on. Our finding on a positive
relationship between IT capital share and MFP growth acceleration provides
evidence for the view that IT raised MFP through complementary organizational
innovation and spillover or network effects.
Table 8
Regression Results for IT and Productivity Growth

1988-2000 1981-2000
0.515*** 0.624***
Constant — —
(3.28) (5.24)
-1.261** -1.590***
IT-Intensity — —
(-2.28) (-3.68)
-0.433* -0.502** -0.542** -0.593***
Post-1995 Dummy
(-1.78) (-2.13) (-2.32) (-2.62)
Post-1995 Dummy*IT- 3.173*** 3.366*** 3.503*** 3.644***
Intensity (3.78) (4.15) (4.33) (4.66)
Note: The coefficient estimates are based on a weighted least square using nominal output as
weights for MFP growth regression. t-statistics are in parentheses. One asterisk denotes
statistical significance at the 10-percent level, two asterisks denote the 5-percent level, and
three asterisks the 1-percent level.
70
Robustness Checks
In this section we provide a number of robustness checks on our finding that IT

is linked to MFP growth. First, we check if our finding is robust when we exclude
those industries with less reliable productivity measures. Second, we check if our
finding is robust when we exclude IT-producing industries. Third, we check if
our result is robust to using an alternative measure of IT capital share.
Beckstead, Girard, and Harchaoui (2001) identified a number of Canadian indus-

tries that have less reliable productivity measures. These industries include con-
struction, financial and real estate, business services, and other services indus-
tries. When we exclude those industries from our MFP growth regression (4), we
find a similar result as is shown in Table 9. Our results show that IT is linked to
post-1995 MFP growth acceleration across these well-measured Canadian indus-
tries. The relationship is statistically significant at the 5 percent level.
IT-producing industries had rapid MFP growth and they were also among the
most IT-intensive.4 When we rerun regression (4) on a sample of industries that
exclude the IT-producing industries, we obtain similar results (Table 10).
Table 9

(on a sample of well-measured industries)
1988-2000 1981-2000
0.717*** 0.484***
Constant — —
(3.82) (5.68)
-1.291 -0.032***
IT Intensive — —
(-1.57) (-4.54)
-0.752*** -0.750*** -0.094 -0.643**
Post-1995 Dummy
(-2.61) (-2.66) (-0.56) (-2.38)
Post-1995 Dummy*IT- 4.757*** 4.644*** 0.050*** 3.063**
Intensity (3.73) (3.73) (3.96) (2.56)
Note: The coefficient estimates are based on a weighted least square regression using nominal
output as weights for MFP growth regression. t-statistics are in parentheses. One asterisk
denotes statistical significance at the 10-percent level, two asterisks denote the 5-percent
level, and three asterisks the 1-percent level.
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Gu & Wang
Table 10

(on a sample of industries excluding IT-producing industries)
1988-2000 1981-2000
0.589*** 0.762***
Constant — —
(3.81) (6.49)
–1.888*** –2.640***
IT Intensive — —
(–3.34) (-5.94)
–0.442* –0.498** –0.615*** –0.646***
Post-1995 Dummy
(–1.85) (–2.13) (–2.68) (–2.86)
Post-1995 Dummy*IT- 3.086*** 3.246*** 3.839*** 3.898***
Intensity (3.61) (3.89) (4.64) (4.81)
Our results above use IT share in capital services as an independent variable.

When we use share of IT capital in nominal gross output, we find our results are
robust to using this alternative measure of IT capital share (Table 11).
Our empirical specification in equation (4) for examining the relationship be-
tween IT and MFP growth puts all the explanatory burden on IT capital share. It
is possible that other variables, such as the share of intermediate input in nomi-
nal output, are also linked to the acceleration in MFP growth. When we replace
IT capital share in Equation (4) by intermediate input share, we find that the new
variable is not related to MFP growth (Table 12).5
In sum, we find strong and robust evidence that IT is linked the post-1995 MFP
growth acceleration across Canadian industries. Our evidence supports the view
that IT raised MFP in Canada through IT-induced organizational innovation and
network or spillover effects.
72
Table 11

(using share of IT capital service in nominal output as independent variable)
1988-2000 1981-2000
0.375*** 0.484***
Constant — —
(3.32) (5.68)
–0.021** –0.032***
IT Service-output ratio — —
(-2.36) (–4.54)
–0.015 –0.034 –0.094 –0.150
Post-1995 Dummy
(–0.09) (–0.20) (-0.56) (–0.92)
Post-1995 Dummy*IT- 0.039*** 0.043*** 0.050*** 0.054***
output Ratio (2.99) (3.35) (3.96) (4.43)
Table 12
Regression Results for Intermediate Inputs and Productivity Growth

1988-2000 1981-2000
0.348 0.855***
Constant — —
(1.36) (4.43)
Intermediate Input-output –0.002 –0.011***
— —
Ratio (–0.51) (–3.25)
0.281 0.336 –0.226 –0.071
Post-1995 Dummy
(0.71) (0.88) (–0.60) (–0.19)
Post-1995 Dummy*Inter. 0.001 –0.001 0.010 0.006
Input-output Ratio (0.08) (–0.14) (1.38) (0.96)
73
Gu & Wang
Our finding for Canada is consistent with the one for the United States that is
reported in Basu et al. (2003). Basu et al. (2003) find that IT use is linked to MFP
growth in the U.S. business sector during the 1990s. They interpret this as evi-
dence that IT has raised multifactor productivity in the United States through
purposeful co-invention in organizational capital and externalities associated
with IT investments.
Stiroh (2002a) has also examined the relationship between IT and MFP growth
revival and finds that IT is not related to the acceleration in MFP growth across
the U.S. manufacturing industries. However, most IT investments are in non-
manufacturing industries such as finance, insurance and real estate, and whole-
sale and retail trade. His focus on manufacturing industries may have missed the
biggest impact from IT.
The Role of Human Capital and Trade Openness for

Productivity Growth
O UR RESULTS SHOW that IT is linked to the post-1995 rise in MFP growth in the
Canadian business sector. In this section, we ask whether there are other
industry characteristics that are related to the MFP acceleration. Previous studies
have argued that firms must have skilled workers to realize the productivity
potential from new technologies such as IT. That is, skilled workers are comple-
mentary to IT in improving productivity performance (Jorgenson, Ho, and Sti-
roh, 2002; Bresnahan, Brynjolfsson, and Hitt, 2002). It can be also argued that the
industries that face greater international competition are more likely to adopt
changes in workplace practices to enhance gains from IT. Indeed, Caselli and
Coleman II (2001) find that countries that are more open to international trade
tend to have faster adoption of computers.
To examine the role of human capital in raising productivity gains of IT, we ex-
tend Equation (4) with an additional variable — the share of university workers
(measured in 1995) and its interaction term with IT intensity (also measured in
1995). The results are shown in Table 13. The positive coefficient on the interac-
tion term between IT capital share and university-educated worker share suggest
that the industries that are both more IT intensive and more skill intensive had
larger gains in productivity growth after 1995. The effects are quite large. Our
estimates show that a 0.1 percentage-point increase in IT capital share and uni-
versity worker share is associated with a 0.2 percentage-point acceleration in an-
nual MFP and labour productivity growth in the 1995-2000 period in comparison
74
Table 13
Regression Results for IT, Human Capital and Productivity Growth

1988-2000 1981-2000
0.829** 0.457
Post-1995 Dummy
(2.09) (1.19)
2.139 2.494
Post-1995 Dummy*IT-Intensity
(1.28) (1.54)
–12.41*** –9.573***
Post-1995 Dummy*University
(–4.98) (–4.00)
18.21*** 14.60**
Post-1995 Dummy*IT-Intensity*University
(2.84) (2.35)
output as weights for MFP growth regression. All regressions include industry fixed
effects. t-statistics are in parentheses. One asterisk denotes statistical significance at the
10-percent level, two asterisks denote the 5-percent level, and three asterisks the 1-percent
level.
with the 1988-95 period. This is consistent with the view that IT and skilled
workers are complementary in improving productivity performance.
Finally, we examine the issue of whether industries that are more open to interna-
tional trade have larger productivity gains from IT. Baldwin and Gu (2003) find that
export orientation is related to growth and success among Canadian manufacturing
plants. As trade data are not available for non-manufacturing industries at our
level of industry detail, we restrict our analysis to a sample of manufacturing
industries. The results are shown in Table 14.
In Table 14, trade openness is defined as the ratio of exports plus imports to
nominal gross output in 1995. In contrast to our results for the business sector,
there is no evidence that MFP accelerated after 1995 for the manufacturing indus-
tries. The positive coefficient on the interaction term of IT intensity and trade
openness suggests that the industries that are more open to international trade
have larger gains in productivity growth in the 1995-2000 period. The coefficient
estimate is statistically significant at the 10 percent level.6
75
Gu & Wang
Table 14
Regression Results for IT, Trade Openness and Productivity Growth
(on a sample of manufacturing industries)
1988-2000 1981-2000
0.662 0.357
Post-1995 Dummy
(0.81) (0.47)
–4.794 –1.631
Post-1995 Dummy*IT-intensity
(–1.15) (–0.42)
–0.874 –0.376
Post-1995 Dummy*Trade
(–1.25) (–0.58)
5.082* 1.606
Post-1995 Dummy*IT-intensity*Trade
(1.59) (0.54)
Note: The coefficient estimates are based on a weighted least square regression nominal output
as weights for MFP growth regression. All regressions include industry fixed effects.
t-statistics are in parentheses. One asterisk denotes statistical significance at the 10-percent
level, two asterisks denote the 5-percent level, and three asterisks the 1-percent level.
Conclusion
I N THIS STUDY, WE HAVE EXAMINED

whether the post-1995 acceleration in produc-
tivity growth in the Canadian business sector is linked to information and
communications technologies. Our main findings are as follows.
First, our results show that the pickup in labour productivity growth in the Ca-
nadian business sector is almost entirely due to the acceleration in MFP growth.
Capital deepening was not a contributing factor to the labour productivity
growth revival. However, capital deepening from IT increased after 1995, mak-
ing a positive though small contribution to the post-1995 labour productivity
growth acceleration in Canada. Our results for Canada are in sharp contrast to
the results for the United States. In the United States, both rapid IT capital deep-
ening and MFP growth acceleration made important contributions to the labour
productivity growth revival during the 1990s.
Second, while IT capital deepening made little direct contribution to the labour
productivity growth revival in Canada during the 1990s, we find that IT is linked
to the MFP growth acceleration in Canada through network and spillover effects.
76
IT has allowed firms to adopt a more efficient work organization and improve
communication between producers and consumers. A number of findings support
this view. First, the MFP growth acceleration was pervasive across industries. The
industries that experienced MFP acceleration in the 1990s accounted for more than
70 percent of output. Second, all MFP growth acceleration in the 1990s was from
IT-intensive industries. Eight of the top ten contributors to the MFP growth accel-
eration are IT-intensive service industries including: retail trade, communication
services, financial services and business services. Third, more IT-intensive indus-
tries showed larger MFP growth acceleration in the 1990s than less IT-intensive
industries. These findings also support the view in Robidoux and Wong (2003) that
the post-1995 productivity growth acceleration that occurred in Canada is a real
phenomenon and not only a cyclical one. If the productivity growth acceleration in
Canada was due to cyclical forces, these cyclical forces would have to be concen-
trated in IT-intensive industries for this to be the whole story.7
Third, consistent with the view that knowledge workers are complementary to
IT, we find that industries that have a larger share of knowledge workers have
larger productivity gains from IT. We also find some evidence that manufactur-
ing industries that are more open to international trade have larger productivity
gains from IT.
Endnotes
1 The two other studies in this volume have also focused on the distinction between IT
use and IT production (Ho, Rao, and Tang, 2003; Harchaoui, Tarkhani, and Khanam,
2003).
2 These tables were constructed in the spring of 2003.
3 Two exceptions are construction and motor vehicles industries.
4 IT-producing industries include communications and other electronic equipment;

office, store and business machines; and telecommunication carriers industries.
5 When we introduce the intermediate input and IT shares in a same equation, we

find that the coefficient on the interaction term of IT share and the post-1995
dummy remains positive and statistically significant at the 5 percent level. The co-
efficient on the interaction of intermediate input share and post-1995 dummy is not
significant at the 10 percent level for the period 1988-2000. However, for the period
77
Gu & Wang
1981-2000, the coefficient on the interaction of intermediate input share and post-
1995 dummy is positive and statistically significant at the 5 percent level.
6 For manufacturing industries, we have run a regression that includes both the
interaction of trade openness and IT and the interaction of skilled worker share
and IT share. We find the coefficient on the former is positive and statistically sig-
nificant at the 5 percent level, suggesting a complementary relationship between IT
and skilled workers in Canadian manufacturing industries. The coefficient on the
interaction of trade openness and IT share is positive. But it is no longer statisti-
cally significant at the 10 percent level.
7 Stiroh (2002b) made a similar argument against the view that the productivity
revival in the United States during the 1990s is not a real phenomenon but only a
cyclical one.
Acknowledgments
W E WOULD LIKE TO THANK John Baldwin, Mike Denny, Erwin Diewert and
Tarek Harchaoui for their helpful comments. Views expressed in this
study do not necessarily reflect those of Statistics Canada nor Industry Canada.
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Beckstead, D., A. Girard, and T.M. Harchaoui. “Quality Rating of Productivity Estimates
and Related Data.” In Productivity Growth in Canada, Statistics Canada Catalogue
No. 15-204, 2001.
Bresnahan, T.F., E. Brynjolfsson, and L. Hitt. “Information Technology, Workplace Or-
ganization, and the Demand for Skilled Labor: Firm-Level Evidence.”
Quarterly Journal of Economics 117, 1 (2002): 339-376.
Brynjolfsson, E., and L. Hitt. “Beyond Computation: Information Technology, Organiza-
tional Transformation and Business Performance.” Journal of Economic
Perspectives 14, 4 (2000): 23-48.
Caselli, F., and W. Coleman II. “Cross-country Technology Diffusion: The Case of Com-
puters.” American Economic Review 91, 2 (2001): 328-335.
Colecchia, A., and P. Schreyer. “ICT Investment and Economic Growth in the 1990s: Is the
United States a Unique Case? A Comparative Study of Nine OECD Countries.”
Review of Economic Dynamics 5, 2 (April 2002): 408-443.
Crawford, A. “Trends in Productivity Growth in Canada,” Bank of Canada Review,
(Spring 2002): 19-32.
Faruqui, U., W. Gu, M. Kaci, M. Laroche, and J.-P. Maynard. “Differences in Productivity
Growth: Canada-U.S. Business Sectors, 1987-2000.” Monthly Labor Review 126, 4
(April 2003): 16-29, Washington (D.C.): Bureau of Labor Statistics.
Gellatly, G., M. Tanguay, and B. Yan. “An Alternative Methodology for Estimating Economic
Depreciation: New Results from Using a Survival Model.” In Productivity Growth in
Canada - 2002. Edited by J.B. Baldwin and T.M. Harchaoui, Statistics Canada Cata-
logue No. 12-204, 2003.
Gera, S., and W. Gu. “The Effect of Organizational Innovation and Information Technol-
ogy on Firm Performance.” Economic Analysis Research Papers, 11F0027MIE2002001,
Statistics Canada. Forthcoming.
Gera, S, W. Gu, and F.C. Lee. “Information Technology and Labour Productivity Growth:
An Empirical Analysis for Canada and the U.S.” Canadian Journal of Economics 32, 2
(1999): 384-407.
Gu, W, M. Kaci, J.-P. Maynard, and M. Sillamaa. “The Changing Composition of the Ca-
in Canada - 2002. Edited by J.R. Baldwin, and T.M. Harchaoui, Statistics Canada
Canada - 2002. Edited by J.R. Baldwin, and T.M. Harchaoui, Statistics Canada Cata-
logue No. 15-204-XPE, 2003.
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Harchaoui, T.M., F. Tarkhani, and B. Khanam. “Information Technology and Economic

Growth in the North American Private Business Sector.” Paper presented at the
37th annual Canadian Economic Association Meeting, 2003.
Ho, M., S. Rao, and J. Tang. “The Impact of ICT on Economic and Productivity Growth at
the Industry Level: A Canada–U.S. Comparison.” Paper presented at the 37th an-
nual Canadian Economic Association Meeting, 2003.
Jorgenson, D.W., M.S. Ho, and K.J. Stiroh. “Growth of U.S. Industries and Investment in
Information Technology and Higher Education.” Harvard University, 2002.
Mimeo.
OECD. The Sources of Economic Growth in OECD Countries, Paris, 2003.
Pilat, D., and F.C. Lee. “Productivity Growth in ICT-Producing and ICT-Using Industries:
A Source of Growth Differentials in the OECD?” OECD STI Working Papers,
No. 2001/4, 2001.
Rao, S., and J. Tang. “The Contribution of ICT to Productivity Growth in Canada and the
United States in the 1990s.” International Productivity Monitor 3 (Fall 2001): 3-18.
Robidoux, B., and B. Wong. “Has Trend Productivity Growth Increased in Canada?” De-
partment of Finance, Canada, 2003. Mimeo.
Stiroh, K.J. “Are ICT Spillovers Driving the New Economy?” Review of Income and Wealth
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⎯⎯⎯. “Information Technology and the U.S. Productivity Revival: What Do the Indus-
try Data Say?” American Economic Review 92, 5 (2002b): 1559-1576.
80
Appendix
Table A1
List of IT-intensive Industries
IT share of Capital
Industry Service in 1995
Educational Service Industries 0.7915
Membership Org. (excl. religious) and Other Service Industries 0.7236
Other Business Services Industries 0.6448
Telecommunication Carriers Industries 0.6447
Amusement and Recreational Services 0.4854
Vegetable Oil Mills (except corn oil) 0.4457
Office, Store and Business Machine Industries 0.3870
Telecommunication Broadcasting Industry 0.3803
Water Systems and Other Utility Industries N.E.C. 0.3709
Plastic and Synthetic Resin Industry 0.3644
Finance and Real Estate Industries 0.3575
Postal and Courier Service Industries 0.3545
Major Appliances Industries (electric and non-electric) 0.3212
Rubber Products Industries 0.3205
Communication and Other Electronic Equipment Industries 0.3169
Industrial Chemicals Industries N.E.C. 0.3146
Retail Trade Industries 0.3121
Other Transport Services 0.3112
Communication and Energy Wire and Cable Industries 0.3059
Refined Petroleum and Coal Products Ind. 0.3010
Record Player, Radio and Television Receiver Industries 0.2868
Wholesale Trade Industries 0.2762
Other Electrical and Electronic Product Industries 0.2661
Other Manufacturing Industries 0.2616
Printing and Publishing Industries 0.2610
Insurance Industries 0.2530
Other Personal Service Industries 0.2492
Other Health and Social Service Industries 0.2398
Accommodation and Food Services Industries 0.2382
Air Transport and Related Service Industries 0.2324
Electric Power Systems Industry 0.2294
Gas Distribution Systems Industry 0.2176
Platemaking, Typesetting and Bindery Industries 0.2157
81
Sources of Output Growth in Canadian and 4
U.S. Industries in the Information Age
Mun S. Ho, Someshwar Rao & Jianmin Tang
Abstract
I N THIS STUDY, WE COMPARE AND CONTRAST the sources of economic and labour
productivity growth in Canadian and U.S. industries, using newly developed
and comparable data for 34 industries covering 1981-2000. We focus on informa-
tion technology (IT), as both outputs and inputs. Our research shows that output
growth in the United States and its acceleration in the second half of the 1990s
were driven largely by the accumulation of IT capital and the increased use of
university trained workers. In contrast, the growth in Canada was mainly due to
the accumulation of non-IT capital and the increased use of non-university la-
bour. The resurgence of the U.S. economy was relatively more concentrated in
IT-producing industries while in Canada it was widespread across industries.
The contribution of IT capital deepening to labour productivity growth in Canada
during the second half of the 1990s was small, but it was the driving force behind
the labour productivity growth revival in the United States and its impact was
widespread across U.S. industries. Finally, in both countries, IT capital had its
largest impact in IT-producing industries, followed by IT-using industries.
Introduction
T HE ACCELERATION IN OUTPUT GROWTH in the second half of the 1990s com-

pared to the first half in Canada and the United States has generated a great
deal of interest and comment, including the general press. Many have pointed
to the rapid growth of investment in information technology (IT) as an impor-
tant factor for this economic revival. The growth in IT investment has been
fuelled largely by the unprecedented decline in the real prices of information
technology equipment and software, which in turn is due to the extraordinary
pace of innovation and productivity growth in industries that produce them.
Meanwhile, the high-tech investment boosted the demand for education and skills
which are essential to their effective use. The proportion of workers with university
83
Ho, Rao & Tang
degrees increased significantly.1 A consensus, while not unanimous, has emerged

from recent growth studies that the increased investments in IT and human capi-
tal are playing a major role in economic growth and labour productivity growth
in both countries.2
However, the size of the impact of the two factors is by no means uniform across
countries or industries. Stiroh (2002) shows that while IT investments affected
many industries in the United States, the degree to which productivity growth is
affected is different across industries. Differences in educational attainment also
occur across industries, as shown by Jorgenson, Ho, and Stiroh (2002). Similar
developments are taking place in Canada, but there are two significant differ-
ences between the two countries. First, Canada is less affected by the IT devel-
opment than the United States — the size of IT-producing industries is small,
and Canada invests less in IT in terms of investment to GDP ratio or IT invest-
ment intensity (Rao and Tang, 2001; Harchaoui, Tarkhani, Jackson, and Arm-
strong, 2002). Second, a smaller portion of the labour force in Canada has univer-
sity education or higher, although the gap narrowed slightly during the second
half of the 1990s (Rao, Tang, and Wang, 2002). We shall discuss these differences
in this study.
The resurgence of growth in output, labour productivity, and total factor produc-
tivity in the United States since 1995 is remarkable. As shown later in this study,
the output of the aggregate business sector in the United States grew at
4.5 percent per year during the second half of the 1990s compared to 2.6 percent
in the first half. Many authors have attributed a key role to IT for this revival. Of
the 4.5 percent growth, IT capital contributed 1.2 percentage points even though
it accounts for less than 10 percent of capital input [e.g. Jorgenson, Ho and Stiroh
(2002) and Oliner and Sichel (2000)]. The acceleration in output growth was even
bigger in Canada, increasing from 2.1 percent per year to 5.0 percent. In Canada,
the IT capital is also playing an increasingly significant role in aggregate output
growth.
However, when compared to the United States, the improvement in labour pro-
ductivity growth (output per hour) in the Canadian business sector was fairly
modest despite greater acceleration in output growth. In the United States, la-
bour productivity growth increased from 1.0 percent per year during 1988-95 to
2.3 percent during 1995-2000, while Canadian productivity growth increased
from 1.6 percent to 1.9 percent. In addition, the sources of labour productivity
growth were different in the two countries. In the United States, the contribution
from IT capital rose from 0.5 to 1.0 percentage points, while in Canada it merely
84
Sources of Output Growth in Canadian and U.S. Industries
increased from 0.3 to 0.5 percentage points. These differences are replicated to
some extent at the detailed industry level.
Our main objective in this study is to provide an in-depth study of the role of IT
revolution in these recent economic and productivity growth trends in Canada.
By using comparable data and methodology, we also compare and contrast the
Canadian findings with the U.S. experience, and explore possible reasons for the
differences in trends in the two economies. In particular, we examine the indus-
try impact of IT and higher education on output and labour productivity growth
in both countries. By disaggregating total capital into IT and non-IT capital and
by separating labour input into university and non-university education, we
examine the reasons for differences in economic and labour productivity growth
across industries in the two countries. Two specific questions are addressed.
First, are differences in industry output and productivity growth between Canada
and the United States linked to IT and higher education? Second, is the difference
in performance widespread, or concentrated just in IT-producing and heavy IT-
using industries?
Using newly developed data covering the 1981-2000 period, we examine and
compare the sources of economic and productivity growth in the two countries
for a set of 34 industries that are specially grouped to focus on IT and to do in-
ternational comparisons. The concordance and industrial classification codes for
both Canada and the United States are listed in Table 1. Most of the sectors are
the familiar two-digit ones, but some industries are further disaggregated. For
example, computer is separated from other machinery; communications and elec-
tronic equipment from other electrical equipment; and business services (including
software), health and education from other services.3
Given our focus on IT, we divide capital input into IT (computer equipment,
communication equipment and software) and non-IT (structures, other machin-
ery and equipment, inventories and land). Although IT capital is only a small
share of total capital (less than 5 percent of the stock in the United States in 2001),
it is growing rapidly. We disaggregate labour input into university and non-
university educated types. On the output side, to measure the impact of IT, fol-
lowing van Ark, Inklaar, and McGuckin (2003), we group the 34 industries into
three major groups — IT-producing, IT-intensive using and non-IT using indus-
tries. To determine whether an industry is an intensive user of IT or not, they used
the share of IT capital in total capital input in U.S. industries from Stiroh (2002).
The IT-producing industries are: computers; communication and electronic
equipment; and communication services. The first two are IT-manufacturing
85
Ho, Rao & Tang
industries and the last is an IT service producing industry.4 The IT-intensive us-
ing industries (hereafter abbreviated as IT-using industries) are: machinery ex-
cluding computers; electrical equipment; other transportation equipment; print-
ing and publishing; miscellaneous manufacturing; wholesale trade; retail trade;
finance, insurance and real estate (FIRE); and business services. The remaining
22 industries in Table 1 are categorized as non-IT industries.
Our paper is a product of the joint research by Industry Canada, Statistics Canada
and Jorgenson Associates.5 An earlier study, Jorgenson and Lee (2001), quantified
the sources of output and productivity growth in Canada and the United States
by developing comparable data for Canada, using the same methodology. Two
of the studies in this monograph presented detailed industry comparisons of
trends of output, inputs and productivity (Gu and Ho, 2000) and productivity
levels (Lee and Tang, 2000) in the two countries. In the present study, we follow
the framework of Gu and Ho (2000), focusing on IT and highly educated labour. 6
In the next section, entitled Empirical Framework, we set up a framework for ex-
amining the sources of output and labour productivity growth at the industry
level. In the same section, we also outline the framework for analyzing the con-
tribution of individual industries to aggregate output and aggregate labour pro-
ductivity growth. In the section entitled Data and Measurements Issues, we de-
scribe the data used. In the section entitled Growth Accounting Results, we report
the results on sources of output and labour productivity growth in individual
industries in the two countries. In this section, we also compare the performance
of the two countries, and give the sources of aggregate output and labour pro-
ductivity growth for both countries. We give a summary of the key findings in
the concluding section.
86
Table 1
List of Industries in the Canadian and U.S. Business Sectors
Canada – United States –

Industrial Classification, Industrial Classification,
Industry SIC 1980 SIC 1987
1 Agriculture Agriculture, Forestry and Fisheries 011-023, 031-033 01,02,07-09

2 Non-energy Mining Non-Energy Mining 061, 062, 081-082, 091-092 10,14
3 Coal Mining Coal Mining 063 12
4 Crude Petroleum Crude Petroleum and Natural Gas 071 13
5 Construction Construction 401-449 15-17
6 Wood and Furniture Lumber, Wood, Furniture 041, 051, 251-259, 261-269 24-25
7 Non-metallic Stone, Clay and Glass 351-359 32
8 Primary Metal Primary Metal 291-299 33
9 Fabricated Metal Fabricated Metal 301-306, 309 34
10 Machinery Machinery Excluding Computers 307, 308, 311-319 35 except 357
11 Computers Computers and Office Equipment 336 357
12 Electrical Equipment Other Electrical Equipment 331-334, 337-339 36 except (366-367)
13 Electronic Equipment Communication and Electronic Equipment 335 366-367
14 Motor Vehicles Motor Vehicles 323-325 371
15 Other Trans. Equipment Other Transportation Equipment 321, 326-329 372-379
16 Misc. Manufacturing Miscellaneous Manufacturing 391-399 38-39
17 Food and Tobacco Food and Tobacco 100-114, 121-122 20-21
18 Textiles Textiles, Apparel, Leather 1711-1719, 181-199, 243-249 22-23, 31
19 Paper and Allied Paper and Allied 271-279 26
87
88
Ho, Rao & Tang

Table 1 (cont’d)
List of Industries in the Canadian and U.S. Business Sectors
Canada – United States –

Industrial Classification, Industrial Classification,
Industry SIC 1980 SIC 1987
20 Printing Printing and Publishing 281-284 27
21 Chemicals Chemicals 371-379 28
22 Petroleum Refining Petroleum Refining 361-369 29
23 Rubber and Plastics Rubber and Plastics 151-159, 161-169 30
24 Transportation Transportation and Warehousing 451-479, 484 40-47
25 Communications Communications 481-483 48
26 Electric Utilities Electric Utilities 491 491, %493
27 Gas Utilities Gas Utilities 492 492, %493
28 Wholesale Trade Wholesale Trade 501-599 50-51
29 Retail Trade Retail Trade 601-692 52-59
30 FIRE Finance, Insurance and Real Estate (Rental) 70-74, 7511-7512, 759, 76 60-67
31 Business Services Business Services 771-779 73, 81
32 Health Services Health and Social Services, Private 862-869 801-809, 83
33 Education, Private Education, Private 851-852, 854-859 82
34 Other Services Other Services 493-499, 911-999 494-497, 70-72, 75-79, 84-87, 89
Empirical Framework
F OLLOWING JORGENSON, GOLLOP, AND FRAUMENI (1987) and Gu and Ho (2000),

we use the growth accounting framework to examine the sources of labour
productivity growth of industries. This framework has been widely used to
study the sources of economic growth. Unlike previous studies, however, our
study concentrates on IT and human capital. We begin at the industry level and
then proceed to describing the decomposition of aggregate growth.
Industry Analysis
We assume that the production function for industry i has the form:
(1) Yi = Ai ⋅ f (K iIT , K iNIT , LBA NBA

i , Li , Mi ) ,
where Yi is annual industry gross output; KiIT and KiNIT are IT and non-IT capi-
tal inputs; LBA
i and LNBA
i are labour inputs with and without at least a B.A. de-
gree; Mi is total intermediate input; and Ai is the augment factor of the input
function, often referred as multifactor productivity (MFP).7
Under the assumption of constant returns to scale and competitive product and
factor markets, the translog index of productivity growth for industry i is :
∆ ln Ai = ∆ ln Yi − vIT ,i ∆ ln K iIT − vNIT ,i ∆ ln K iNIT

(2)
− vBA ,i ∆ ln LBA NBA
i − vNBA ,i ∆ ln Li − vm ,i ∆ ln Mi ,
where ∆ ln X = ln Xt − ln Xt − 1 , and vX ,i is the two-period average income share of

input X in the value of gross output, and the sum of income shares of all inputs
equals to one.8 For example,
piM,t M i ,t
vm , i , t = ; vm ,i ,t = 21 ( vm , i ,t -1 + vm , i ,t ) ,
piY,tYi ,t
where the p's denote the corresponding prices.
89
Ho, Rao & Tang
We shall also be examining the growth in output per hour worked, or labour
productivity growth. By rewriting Equation (2), the translog index of labour pro-
ductivity growth for industry i may be expressed as:
∆ ln yi = ∆ ln Ai + vIT , i ∆ ln kiIT + vNIT , i ∆ ln kiNIT

(3)
+ vBA ,i ∆ ln liBA + vNBA , i ∆ ln liNBA + vm , i ∆ ln mi ,
where the lower case variables denote the corresponding quantity per hour
worked. Denoting the total hours worked by Hi, we have:
y i = Yi / H i is gross output labour productivity;

kiIT = K iIT H i is IT capital intensity;
kiNIT = K iNIT H i is non-IT capital intensity;
liBA = LBA
i H i is labour quality improvement due to university labour input;
liNBA = LNBA
i H i is labour quality improvement due to non-university labour
input; and
mi = Mi H i is intermediate input intensity.
Labour productivity growth is equal to the change in MFP plus the weighted
sum of changes in intensity of inputs. The change in capital input intensity is
often referred to as capital deepening. Under this framework, the change in MFP is
measured as the residual of labour productivity growth net contributions from
capital deepening, labour quality improvement and an increase in intermediate
input intensity.9 Because of the constant return to scale assumption, MFP derived
from Equations (2) and (3) will be identical.
Each of the inputs in Equation (1) is an aggregate of many components. Interme-

diate input consists of energy, non-energy materials and purchased services.10
Capital includes machinery and equipment, structures, land and inventories.
Labour is cross-classified by sex, age and education. Capital and labour inputs
are aggregated using a constant quality method. Capital inputs are quantity in-
dexes of capital stocks, using rental prices as weights. The difference of the
growth rates of capital input and stock is the growth rate of industry capital
quality (or change in the composition index). Similarly, labour inputs are quan-
tity indexes of hours worked using labour compensation as weights. The differ-
ences in growth rates between labour inputs and hours are the growth rates of
labour quality for university and non-university labour.11 The quality adjustment is
consistent with the production theory, which suggests that the marginal product of
90
an input should generally equal its price. Our approach here of separating IT
capital from non-IT will generate slower changes in capital quality indexes than
previous work which employs only one capital input index. A detailed discussion
of measuring constant quality capital and labour inputs is given in Appendix A.
Industrial Contributions to Aggregate Productivity Growth
In order to provide an overall view of the entire business sector, in this section
we describe a framework to aggregate across industries.12 The existence of an
aggregate production function requires strong assumptions. Here we follow the
production possibility frontier approach in Jorgenson, Ho, and Stiroh (2002),
which relaxes the assumptions of identical industry value-added functions.
Aggregate value added is defined as a translog index over industry value

added:13
34
(4) ∆ ln V = ∑ w
i ∆ ln Vi ,
i =1
where w i is the two-period average share of industry nominal value added in

aggregate value added:
pVitVit
wit = .
∑ j pVjtVjt
The value added of industry i is defined as an index of gross output less inter-
mediate inputs:
1
(5) ∆ ln Vi = ⎡ ∆ ln Yi − ( 1 − vv , i ) ∆ ln Mi ⎤⎦ ,
vv , i ⎣
where vv ,i is the two-period average share of nominal value added in nominal
gross output in industry i.
The production function for aggregate value added is written as:
(6) V = A ⋅ f (K IT , K NIT , LBA , LNBA ) ,
91
Ho, Rao & Tang
where K IT and K NIT are aggregate IT and non-IT capital inputs; LBA and LNBA
are aggregate university and non-university labour inputs; and A is aggregate
MFP.
As in the industry framework, under the assumption of constant returns to scale

and competitive product and factor markets, the translog index of aggregate
MFP growth is:
(7) ∆ ln A = ∆ ln V − vIT ∆ ln K IT − vNIT ∆ ln K NIT − vBA ∆ ln LBA − vNBA ∆ ln LNBA ,
where vX is the two-period average income share of input X in the value of ag-
gregate value added, and the sum of income shares of all factor inputs equals 1.
Each aggregate input is defined as a translog index over the industry input. For
example, IT capital input is:
34
(8) ∆ ln K IT = ∑ w
IT ,i ∆ ln K iIT ,
i =1
IT ,i is the two-period average share of industry IT capital income in ag-

where w
gregate IT capital income.14
Let Ht = ∑iHi,t denote the aggregate hours worked. Rewriting Equation (7) in
terms of per hour worked intensities, the translog index of labour productivity
growth at the aggregate level is:
(9) ∆ ln LVP = ∆ ln A + vIT ∆ ln k IT + vNIT ∆ ln k NIT + vBA ∆ ln l BA + vNBA ∆ ln l NBA ,
where the lower case variables denote the corresponding quantities per hour
worked.
LVPt = Vt / H t is aggregate value added per hour worked;

k IT = K IT H is aggregate IT capital intensity;
k NIT = K NIT H is aggregate non-IT capital intensity;
l BA = LBA H is labour quality improvement due to aggregate university la-
bour input; and
92
l NBA = LNBA H is labour quality improvement due to aggregate non-

university labour input.
We also define industry value added per hour worked as:
LVPit = Vit / H it .
This should be distinguished from gross output per hour defined in Equation (3).
With the above pieces, we can now describe the decomposition of aggregate
productivity into the industry contributions. Subtracting hours from both sides
of Equation (4), we get the relation between aggregate labour productivity and
industry productivity:
34
⎛ 34 ⎞
(10) ∆ ln LVP = ∑ w i ∆ ln LVPi + ⎜ ∑ w i ∆ ln H i − ∆ ln H ⎟ .
i =1 ⎝ i =1 ⎠
The first term is industry contributions to the aggregate labour productivity and
the second term is the reallocation of hours across industries.
The relation between aggregate and sectoral MFP is derived by multiplying both
sides of the industry MFP equation [Equation (2)] by the industry share of value
added, w i , dividing by the share of value added in industry output, vv ,i and
summing over all industries. Then substituting Equations (4), (5), and (7) we get:
34
wi
∆ ln A = ∑ ∆ ln Ai
i =1 vv , i
⎛ 34 w ⎞
+ ⎜⎜ ∑ i vIT ,i ∆ ln K IT ,i − vIT ∆ ln K IT ⎟⎟
⎝ i = 1 vv , i ⎠
⎛ 34 w ⎞
(11) + ⎜⎜ ∑ i vNIT ,i ∆ ln K NIT ,i − vNIT ∆ ln K NIT ⎟⎟
⎝ i = 1 vv , i ⎠
⎛ 34 w ⎞
+ ⎜⎜ ∑ i vBA , i ∆ ln LBA ,i − vBA ∆ ln LBA ⎟⎟
⎝ i = 1 vv , i ⎠
⎛ 34 w ⎞
+ ⎜⎜ ∑ i vNBA , i ∆ ln LNBA ,i − vNBA ∆ ln LNBA ⎟⎟ .
⎝ i = 1 vv , i ⎠
93
Ho, Rao & Tang
The first term in above equation is the “Domar weighted” aggregate MFP growth
(Domar 1961). The next four terms are the reallocation effects of four primary
factors across industries.
Given the way we defined aggregate factor input in Equation (8), which is unlike
the treatment in Jorgenson, Ho and Stiroh (2002), the reallocation effects are es-
sentially zero. Thus Equation (11) is essentially:
34
wi
(12) ∆ ln A = ∑ ∆ ln Ai .
i =1 vv , i
i / vv ,i , are the Domar weights, which sum to more than one

The weights, w
(roughly the ratio of total gross output to total value added). As shown later in
Table 20, it is around two for both Canada and the United States. This total re-
flects the fact that, at the aggregate level, output is based on value added, while
at the industry level, output is based on gross output which includes intermedi-
ate input. As noted by Jorgenson and Stiroh (2000), the weighted aggregate MFP
typically grows faster than MFP at the industry level since the efficiency gains
are magnified as they work their way through the production process.
Data and Measurement Issues
T O IMPLEMENT THE ABOVE FRAMEWORK we require comparable Canada and U.S.

business sector KLEMS (capital, labour, energy materials, and services), data
for the 1981-2000 period. These data include volume indexes of gross output,
capital services, labour services, intermediate inputs, the number of hours at
work and cost in dollars of each of these inputs. The data source for the United
States is Jorgenson, Ho, and Stiroh (2002). They have developed such a dataset
for 44 industries. The present study collapses the 44 industries into the 34 com-
mon industries (Table 1) using Tornqvist aggregation indexes. The Canadian
data are obtained from the Canadian Productivity Accounts which produce and
maintain a consistent set of detailed industry (122 industries) and aggregated
data on inputs and outputs (current prices and chained Fisher indexes) for pro-
ductivity measurement and related economic performance analysis.15 The 122
industries are aggregated into the 34 industries in the same fashion. The Cana-
dian and U.S. data used in this study employ concepts and methods which ac-
cord with the Organisation for Economic Co-operation and Development
94
(OECD) productivity manual, thereby making the comparison between the two
countries reliable.
Note, however, that like many other studies, the estimates in this study are sub-
ject to measurement errors for both output and inputs, especially for those in the
services industries. Estimates for industries with consistently negative productiv-
ity growth should be interpreted with caution (for possible reasons for consis-
tently negative productivity growth, see Rao, Sharpe, and Tang, 2003).
For this study, gross output and intermediate input values come from a time
series of consistent input-output tables. The price indexes for output also are
from Statistics Canada and are also used to construct prices of intermediate in-
puts. The input-output tables are generally recorded in a very similar fashion in
Canada and the United States. Thus, output and intermediate inputs are fairly
comparable. However, our construction of capital and labour inputs is more
complicated and some elaboration is in order here.
Capital Input
Capital stock for each type of asset is constructed by using investment data in
constant dollars. Thus, investment price is important for the comparability of
capital input in Canada and the United States. This is especially true for IT assets
since there is no standard methodology to estimate IT investment prices.
IT assets for both Canada and the United States are computer equipment, com-
munication equipment, and software. The IT has become increasingly important
in total machinery and equipment investment.16 The investment price indexes for
those assets diverge significantly across OECD countries due to different meth-
odologies used in estimating the indexes.17 Thus, it is important here to docu-
ment the methodology used in Canada and the United States. Fortunately, the
methods used by Canada and the United States to develop the IT price indexes
are fairly similar. Statistical agencies in Canada and the United States have
worked very closely and made extensive use of the hedonic regression technique
and the match model technique in estimating the prices of IT.18 IT price indexes
comparisons and a detailed documentation of the methodologies used to con-
struct IT price indexes are given in Appendix B.
It should be noted that the two countries estimate capital stock at the industry
level in quite different ways. The United States calculates aggregated flows
from commodity data and then spread them using the Tangible Wealth Survey
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Ho, Rao & Tang
produced by the Bureau of Economic Analysis (BEA)—a method that is indirect

and does not allow for very detailed annual changes. For Canada, capital stock
data are constructed from investment series by asset classes that are collected
from an investment survey of establishments at the industry level. For this pro-
ject, the data are taken from that contained in the input-output tables and depre-
ciation rates are based on age-price profile using used asset prices that are col-
lected on dispositions of assets by the same industry based survey (Harchaoui et
al. 2002). There are 28 non-residential asset types in the Canadian classification,
and 52 in the United States. The capital stocks are estimated for all types of assets
owned by each industry using the perpetual inventory method and geometric
depreciation.
The geometric depreciation rates for 26 non-residential reproducible capital as-

sets in Canada are listed in Table 2.19 With the exception of software assets, all of
non residential capital assets depreciation rates were based on an age-price pro-
file method using 30,000 observations on used asset prices collected by a Statistics
Canada survey (Gellatly, Tanguay, and Yan 2003). The U.S. depreciation rates for
the same 26 assets are also given in Table 1, which are derived from 52 assets. For
automobiles and computers, the U.S. geometric depreciation rates are based on
Jorgenson, Ho, and Stiroh (1999). The remaining assets are from the U.S. Bureau
of Economic Analysis, derived from a variety of sources (Fraumeni 1997).
The depreciation rates are significantly higher in Canada than in the United
States for IT and structures. Our experiments with Canadian aggregate invest-
ment data show that this may under- or over-estimate capital stock growth of an
asset in Canada relative to the United States, depending on the growth rate of
investment in the asset—though it has less of an influence on the growth of capi-
tal services that are used here. If the asset is a faster growth investment, then a
higher depreciation rate will lead to a higher growth of capital stock. This is the
case for IT investment, especially for the second half of the 1990s. On the other
hand, if the asset is a slower growth investment, then a higher depreciation rate
will lead to a slower growth of capital stock. This is the case for structures. There-
fore, the difference in the usage of depreciation rates in deriving IT and non-
capital inputs will generally lead to higher IT capital and lower non-IT capital
contribution to economic growth. Similarly, it will lead to a higher contribution
of IT capital deepening or a lower contribution of non-IT capital deepening to
labour productivity growth.
96
Table 2
Depreciation Rates of Non-residential Reproducible Capital Assets in

Canada and the United States
Reproducible Assets Canada United States

High-Tech
1 Computers and Office Equipment 0.51 0.22
2 Communication Equipment 0.20 0.11
3 Pre-packaged Software 0.67 0.32
4 Custom Designed Software 0.40 0.32
5 Own Account Software 0.40 0.32
Low-tech
6 Office Furniture, Furnishing 0.33 0.11
7 Household and Services Machinery and Equipment 0.14 0.17
8 Electrical Industrial Machinery and Equipment 0.19 0.07
9 Non-electrical Industrial Machinery and 0.22 0.12
Equipment
10 Industrial Containers 0.05 0.11
11 Conveyors and Industrial Trucks 0.18 0.19
12 Automobiles and Buses 0.20 0.23
13 Trucks (Excluding Industrial Trucks) and Trailers 0.20 0.19
14 Locomotives, Ships and Boats 0.12 0.06
(Including Major Replacement Parts)
15 Aircraft, Aircraft Engines and 0.06 0.08
Other Major Replacement Parts
16 Other Equipments 0.20 0.15
Structures
17 Non-residential Building Construction 0.07 0.03
18 Road, Highway and Airport Runway Construction 0.10 0.03
19 Gas, Oil Facility Construction 0.08 0.05
20 Electric Power, Dams and Irrigation Construction 0.06 0.02
21 Railway and Telecommunications Construction 0.10 0.02
22 Other Engineering Construction 0.08 0.04
Tenants Occupied Dwelling
23 Singles 0.02 0.01
24 Multiples 0.02 0.01
25 Mobiles 0.02 0.05
26 Cottages 0.02 0.02
Sources: Software and assets associated with tenants occupied dwelling for Canada are from
conversation with the Investment and Capital Stock Division of Statistics Canada and
the rest are from Gellatly, Tanguay and Yan (2003). For the United States, it was based
on Jorgenson, Ho and Stiroh (1999).
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Ho, Rao & Tang
The difference in depreciation rates may also lead to a different estimate of MFP
growth rate due to MFP being calculated as residuals of gross output net all in-
puts. Given that the value of structures is much larger than that of IT, the overall
impact may lead to a higher estimate of MFP growth rate. However, further
study is required for reaching a firm conclusion.
Labour Input
In our framework, labour inputs for each industry are hours worked aggregated
over the demographic groups using labour compensation as weights. The labour
categories used for Canada include seven age groups, four education attainment
groups, two sexes and two classes of employment. The classification details are
listed in Table 3 for both countries. The labour force categories for the two coun-
tries are generally similar except for education.20 In the Canadian calculations,
B.A. degree and above is a single group, whereas in the U.S. data it is divided
into B.A. and more than B.A. However, our experiments with U.S. data show
that this distinction has a negligible impact on the labour input estimates.
For Canada, the labour data are derived from the Census of Population, supple-
mented by the annual Survey of Consumer Finance and the monthly Labour
Force Surveys. The estimates of hours worked and labour compensation for each
industry are benchmarked to official measures of hours worked and compensa-
tion by Statistics Canada. A detailed description is given in Gu, Kaci, Maynard,
and Sillamaa (2003).
For the United States, the labour data are derived from the Census of Population
and the annual Current Population Survey, supplemented by U.S. National In-
come and Product Account (NIPA) data produced by the U.S. Bureau of Eco-
nomic Analysis (BEA). The final estimates of hours, based on the hours paid
from the BEA, for each industry is scaled to hours worked from the Survey of
Hours at Work by the U.S. Bureau of Labor Statistics. Similarly, the individual
labour compensation data from the population surveys are scaled so that total
labour compensation in each industry matches the NIPA totals. For a detailed
discussion, see Jorgenson, Ho, and Stiroh (2002).
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Table 3
Labour Force Matrix in Canada and the United States, 1981-2000
Canada
Characteristics Number of Categories Type
Sex 2 Female, male

Class of Employment 2 Paid employees, self-employed
Age 7 15-17, 18-24, 25-34, 35-44, 45-54, 55-64, 65+ years
Education 0-8 years grade school, some or completed high school, some or com-
4
pleted post-secondary, university or above
United States
Characteristics Number of Categories Type
Sex 2 Female, male
Class of Employment 2 Paid employees, self-employed
Age 7 16-17, 18-24, 25-34, 35-44, 45-54, 55-64, 65+ years
Education 1981-1992 0-8 years grade school, 1-3 years high school,
6 4 years high school, 1-3 years college, 4 years college, 5 years college or
more
1992-2000 0-8 years grade school; grade 9-12, no diploma; high school graduate;
some college, no B.A.; bachelor’s degree; more than B.A. degree
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Ho, Rao & Tang
Growth Accounting Results
W E NOW REPORT THE RESULTS FROM APPLYING THE FRAMEWORK developed in

the second section, beginning with the accounts from each of the 34 indus-
tries. We first examine the sources of output growth and then the sources of la-
bour productivity growth in individual industries in Canada and the United
States. Finally in the section entitled Aggregate Growth and Sector Contributions, we
report results on the decomposition of the growth in aggregate output and ag-
gregate labour productivity in both countries.
Sources of Economic Growth at the Industry Level
Based on Equation (2), gross output growth of each industry is decomposed into
MFP and the contributions associated with the five inputs — IT capital, non-IT
capital, university labour, non-university labour and intermediate inputs. The
decomposition results for Canada are reported in Tables 4 through 6 for three
sub-periods: 1981-88, 1988-95, and 1995-2000.21 The results for the United States
are in Tables 7 through 9. For analytical purposes, we also report averages for the
IT-producing, IT-using, and non-IT groups.22
IT-producing Industries
By any standard, the output growth in the three IT-producing industries has
been extraordinary. In Canada, gross output of the computer equipment industry
grew at 16.5 percent per year in the late 1990s after a growth of 23.5 percent in
the 1980s. Over the latter half of the 1990s, gross output of the communication
and electronic equipment industry grew at 14.5 percent, compared to 5.7 percent
growth rate in the communications industry. The U.S. growth rates were even
more astounding in the boom period of 1995-2000: computer equipment at
31.5 percent per year, communication and electronic equipment at 23.5 percent
and communications at 6.4 percent. On average, gross output in IT-producing
industries grew at an annual rate of 8.5 percent in Canada and 10.5 percent in the
United States over the past 20 years.
The unprecedented output growth rates were mainly due to the strong growth
in MFP and intermediate input. Over the last 20 years, the average MFP growth
in the three IT-producing industries in Canada was 2.3 percent while in the
United States, it was 4.2 percent. The contribution from the intermediate input
was also sizable — 4.1 percentage points in Canada and 4.5 percentage points in
100
Sources of Output Growth in Canadian and U.S Industries
the United States. The contributions from other factors such as IT capital and
university-labour were relatively small. However, the absolute contributions of
IT investment to output growth in these industries are considerably larger than
in the IT-using or non-IT industries.
Gross output growth in the U.S. IT-producing industries accelerated in the sec-
ond half of the 1990s from the first half mainly due to the increase in MFP
growth and the increased contribution from intermediate inputs. By contrast, the
acceleration in output growth in Canada was relatively small.
IT-using Industries
IT-using industries, on average, grew faster than non-IT industries in both Canada
and the United States in the second half of the 1990s. In Canada, the gross output
growth of these industries was due to a higher growth in intermediate input and
non-university labour, followed by non-IT and IT capital. In the United States, IT
investments again played a larger role. Of the 5.0 percent annual output growth,
intermediate input contributed 2.3 percent and IT capital 1.0 percent. In both
countries, MFP growth did not play a significant role in these industries.
The acceleration in output growth during the second half of the 1990s was much
greater in Canada than in the United States. However, the sources of increase in
output growth were different in the two countries. In Canada, the biggest change
was non-university labour, the growth rate of which changed from 0.1 to
1.0 percent per year, while in the United States, IT capital growth rose from 0.4 to
1.0 percent.
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Table 4
Sources of Gross Output Growth in Canadian Industries, 1981-88
Contributions
Gross Non-IT University Non-university Intermediate
Industry Output MFP IT Capital Capital Labour Labour Input
1 Agriculture 0.87 1.35 0.00 –0.53 0.03 0.06 -0.04
2 Non-energy Mining 1.31 1.60 0.01 0.21 0.05 –0.49 -0.08
3 Coal Mining 8.96 7.25 0.00 0.72 –0.03 –0.10 1.12
4 Crude Petroleum 4.00 0.94 0.01 2.87 0.14 0.24 -0.20
5 Construction 1.57 –0.01 0.03 0.08 0.05 0.55 0.87
6 Wood and Furniture 4.91 1.41 0.02 0.03 0.08 0.48 2.89
7 Non-metallic 2.26 1.11 0.03 –0.36 0.07 0.10 1.31
8 Primary Metal 2.16 1.04 0.07 –0.04 0.00 –0.32 1.41
9 Fabricated Metal 1.46 0.56 0.06 –0.02 0.03 0.04 0.78
10 Machinery 0.72 –0.07 0.06 –0.25 0.12 0.45 0.41
11 Computers 23.49 9.84 0.32 1.21 0.37 0.23 11.52
12 Electrical Equipment 1.08 0.44 0.14 0.06 0.12 –0.55 0.87
13 Electronic Equipment 8.54 0.85 0.37 0.85 0.60 0.99 4.88
14 Motor Vehicles 9.79 0.91 0.06 0.63 0.06 0.63 7.50
15 Other Trans. Equipment 0.20 –0.81 0.06 0.00 0.31 –0.24 0.87
16 Misc. Manufacturing 1.72 0.03 0.12 0.22 0.10 0.38 0.86
17 Food and Tobacco 1.04 –0.21 0.03 0.01 0.04 –0.01 1.18
18 Textiles 1.29 0.09 0.03 0.08 0.10 –0.02 1.01
19 Paper and Allied 2.58 –0.13 0.04 0.55 0.03 –0.01 2.12
20 Printing 3.26 –0.48 0.08 0.33 0.11 1.17 2.04
21 Chemicals 2.90 1.02 0.06 –0.23 0.07 0.09 1.89
Table 4 (cont’d)
Contributions
22 Petroleum Refining –2.03 –1.44 0.02 –0.01 –0.04 –0.14 -0.41

23 Rubber and Plastics 5.17 0.69 0.10 0.52 0.05 0.85 2.95
24 Transportation 3.63 1.61 0.09 0.15 0.09 0.33 1.36
25 Communications 5.39 2.42 0.84 0.45 0.26 0.20 1.23
26 Electric Utilities 3.57 1.14 0.61 0.52 0.11 0.09 1.10
27 Gas Utilities 1.49 –1.72 0.32 1.95 0.23 0.48 0.24
28 Wholesale Trade 6.00 2.80 0.13 0.43 0.35 0.78 1.52
29 Retail Trade 3.33 0.42 0.12 0.33 0.26 1.27 0.93
30 FIRE 3.38 –1.13 0.41 1.52 0.29 0.41 1.88
31 Business Services 6.39 –0.91 0.65 0.79 1.90 1.83 2.14
32 Health Services 4.73 –1.34 0.15 0.29 1.77 2.12 1.74
33 Education, Private 1.84 –2.99 0.49 0.15 1.51 1.70 0.97
34 Other Services 3.01 –1.18 0.56 0.60 0.29 1.07 1.66
Industry Group
IT-producing Industries 8.05 2.83 0.67 0.62 0.35 0.39 3.19
IT-using Industries 3.69 0.01 0.27 0.74 0.44 0.77 1.46
Non-IT Industries 2.73 0.34 0.11 0.33 0.12 0.34 1.49
Note: IT-producing industries are computer, electronic (including communication) equipment and communications (services). IT-using industries are
machinery, electrical equipment, printing and publishing, other transportation equipment, miscellaneous manufacturing, wholesale trade, retail
trade, finance, insurance and real estate, and business services. Non-IT industries are the remaining industries.
The gross output column shows the growth rates, the five columns of input contributions indicate the growth rates multiplied by the share weights,
and the multifactor productivity (MFP) column provides growth rates.
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Table 5
Contributions
1 Agriculture 3.15 1.99 0.03 –0.40 0.11 –0.16 1.58
2 Non-energy Mining 0.03 0.24 0.02 –0.40 0.14 0.00 0.03
3 Coal Mining –0.31 1.26 0.02 –1.42 0.00 0.18 -0.35
4 Crude Petroleum 3.53 1.55 0.01 0.95 0.02 –0.08 1.08
5 Construction –1.82 –0.66 0.02 0.08 0.06 –0.29 -1.02
6 Wood and Furniture 0.76 –0.40 0.02 0.16 0.08 –0.20 1.10
7 Non-metallic –3.01 –0.46 0.05 –0.25 0.07 –1.01 -1.41
8 Primary Metal 1.45 1.45 0.03 –0.27 0.00 –0.56 0.80
9 Fabricated Metal –1.13 0.14 0.01 –0.17 0.05 –0.37 -0.78
10 Machinery 3.27 1.17 0.08 0.36 0.12 –0.35 1.87
11 Computers 19.81 3.43 0.11 0.12 0.04 –0.19 16.31
12 Electrical Equipment –3.40 0.22 0.11 –0.31 –0.01 –1.34 -2.07
13 Electronic Equipment 9.30 2.46 0.13 0.19 0.50 –0.58 6.60
14 Motor Vehicles 4.84 0.65 0.01 0.19 0.08 0.03 3.88
15 Other Trans. Equipment 2.89 0.96 0.02 0.19 0.13 –0.65 2.24
16 Misc. Manufacturing 0.25 0.18 0.12 0.12 0.21 –0.49 0.10
17 Food and Tobacco 0.60 0.28 0.08 –0.14 0.10 –0.18 0.46
18 Textiles –1.93 0.86 0.03 –0.21 0.07 –1.33 -1.36
19 Paper and Allied 1.29 1.55 0.02 –0.56 0.05 –0.38 0.60
20 Printing –2.29 –1.92 0.21 0.18 0.19 –0.47 -0.48
Table 5 (cont’d)
Contributions
21 Chemicals 1.44 0.77 0.11 0.18 0.16 –0.22 0.44

22 Petroleum Refining 1.07 0.52 0.04 –0.09 0.06 –0.13 0.66
24 Transportation 2.18 0.14 0.10 0.33 0.21 0.44 0.97
25 Communications 4.70 0.60 1.63 0.95 0.40 –0.09 1.21
26 Electric Utilities 1.81 –0.92 0.21 0.96 0.22 0.23 1.11
27 Gas Utilities 3.11 –0.84 0.27 1.96 0.39 0.62 0.70
28 Wholesale Trade 3.20 0.53 0.21 0.33 0.54 0.49 1.10
29 Retail Trade 1.76 –0.06 0.17 0.32 0.33 0.22 0.79
30 FIRE 3.37 0.72 0.34 0.61 0.49 0.05 1.15
32 Health Services 1.96 –0.21 0.10 0.19 0.43 0.93 0.52
34 Other Services 1.63 –0.58 0.21 0.23 0.31 0.40 1.06
Industry Group
IT-producing Industries 7.86 1.39 1.02 0.65 0.39 –0.24 4.65
Non-IT Industries 1.22 0.20 0.07 0.11 0.14 –0.05 0.76
105

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Table 6
Contributions
1 Agriculture 3.53 2.12 0.07 0.38 0.04 –0.55 1.48
2 Non-energy Mining 0.76 –0.86 0.05 0.82 0.17 0.84 -0.26
3 Coal Mining –1.65 2.55 0.06 –1.22 –0.08 –1.16 -1.81
4 Crude Petroleum 4.39 –2.57 0.04 3.79 0.07 0.09 2.97
5 Construction 3.62 0.19 0.04 0.16 0.14 1.11 1.97
7 Non-metallic 5.11 1.85 0.07 0.05 0.15 0.63 2.36
8 Primary Metal 4.74 0.96 0.04 0.29 0.05 0.22 3.19
9 Fabricated Metal 6.12 0.49 0.07 0.49 0.18 1.31 3.57
10 Machinery 1.73 –1.20 0.15 0.56 0.19 1.17 0.84
11 Computers 16.52 5.91 0.12 0.12 0.14 0.20 10.04
12 Electrical Equipment 4.38 0.01 0.30 0.91 0.24 0.68 2.25
14 Motor Vehicles 7.96 1.23 0.04 0.29 0.07 0.44 5.90
15 Other Trans. Equipment 7.13 –1.09 0.06 2.03 0.20 0.64 5.30
16 Misc. Manufacturing 5.55 0.48 0.25 0.51 0.22 0.61 3.49
17 Food and Tobacco 2.87 –0.50 0.14 0.33 0.09 0.32 2.48
18 Textiles 1.30 –0.72 0.09 0.12 0.16 0.50 1.16
19 Paper and Allied 1.83 0.28 0.07 0.57 0.04 0.19 0.68
20 Printing 3.89 –1.66 0.42 0.34 0.34 0.94 3.52
Table 6 (cont’d)
Contributions
21 Chemicals 2.24 0.18 0.13 0.45 0.23 0.25 0.99

22 Petroleum Refining 2.75 –0.05 0.01 –0.03 0.12 0.23 2.47
24 Transportation 3.78 0.39 0.24 0.65 0.13 0.81 1.55
25 Communications 5.69 1.71 2.04 0.97 0.01 –0.05 1.01
26 Electric Utilities 0.67 0.80 0.45 –1.31 0.03 0.06 0.64
27 Gas Utilities 0.99 –0.95 0.69 1.61 –0.10 –0.34 0.07
28 Wholesale Trade 6.71 0.85 0.38 0.57 0.56 1.88 2.46
29 Retail Trade 5.50 1.86 0.39 0.39 0.20 0.46 2.20
30 FIRE 4.99 0.96 0.59 0.46 0.25 0.32 2.41
31 Business Services 11.37 0.15 0.65 1.05 2.68 2.20 4.64
32 Health Services 4.55 –3.78 0.09 0.15 5.00 1.23 1.85
33 Education, Private 22.35 4.33 0.12 0.03 8.84 4.07 4.96
34 Other Services 5.38 0.97 0.32 0.19 0.25 0.77 2.88
Industry Group
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Table 7
Sources of Gross Output Growth in U.S. Industries, 1981-88
Contributions
1 Agriculture 0.77 1.63 0.01 –0.26 0.14 –0.17 -0.58
2 Non-energy Mining 1.56 1.31 0.03 –0.56 –0.14 –1.06 1.97
3 Coal Mining 2.09 3.29 0.01 –0.36 –0.06 –1.85 1.07
4 Crude Petroleum –2.45 0.28 0.07 1.25 –0.24 –0.57 -3.25
5 Construction 3.31 –0.14 0.00 –0.11 0.29 1.24 2.04
7 Non-metallic 2.11 1.24 0.01 –0.12 0.15 0.00 0.83
8 Primary Metal –1.89 0.83 0.04 –0.32 –0.02 –0.62 -1.80
9 Fabricated Metal 1.37 0.66 0.08 0.06 0.02 –0.25 0.80
10 Machinery –1.75 –0.77 0.21 0.14 0.12 –1.05 -0.40
11 Computers 22.44 11.53 0.11 0.01 0.82 –0.18 10.14
12 Electrical Equipment 2.44 1.21 0.17 –0.06 0.39 –0.71 1.44
14 Motor Vehicles 6.59 0.79 0.03 0.02 0.05 0.13 5.56
15 Other Trans. Equipment 3.29 0.05 0.31 0.22 0.64 0.06 2.01
17 Food and Tobacco 1.82 1.04 0.07 0.14 0.05 –0.16 0.67
18 Textiles 1.38 0.71 0.04 0.04 0.13 –0.57 1.03
19 Paper and Allied 2.73 0.20 0.06 0.30 0.17 0.13 1.86
20 Printing 4.16 –0.43 0.36 0.46 0.71 0.53 2.52
Table 7 (cont’d)
Contributions
21 Chemicals 1.18 0.78 0.13 0.11 0.28 –0.25 0.13

22 Petroleum Refining 2.09 3.76 0.01 0.03 0.02 –0.10 –1.63
24 Transportation 3.39 0.82 0.07 –0.10 0.62 0.30 1.69
25 Communications 1.50 –0.35 0.74 0.75 0.23 –0.48 0.61
27 Gas Utilities –4.74 –3.76 0.13 0.10 0.00 –0.11 –1.10
28 Wholesale Trade 4.94 1.89 0.75 0.79 0.36 0.42 0.73
29 Retail Trade 3.23 –0.14 0.23 0.36 0.44 0.84 1.50
30 FIRE 4.45 –0.75 0.57 1.72 0.62 0.24 2.05
32 Health Services 4.07 –0.48 0.43 0.69 1.39 0.87 1.17
34 Other Services 3.81 0.19 0.06 0.39 0.34 1.04 1.78
Industry Group
IT Producing Industries 7.83 3.26 0.57 0.68 0.43 –0.32 3.20
IT-Using Industries 3.78 –0.08 0.59 0.79 0.64 0.39 1.45
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Table 8
Contributions
1 Agriculture 2.73 1.67 0.03 0.10 0.36 –0.08 0.66
2 Non-energy Mining 2.33 1.09 0.18 0.18 0.28 0.01 0.60
3 Coal Mining 1.14 3.40 0.15 –0.20 0.07 –1.13 -1.15
4 Crude Petroleum –1.27 0.20 0.06 –0.75 0.14 –0.28 -0.66
5 Construction –0.65 –1.33 0.06 0.05 0.12 0.38 0.07
6 Wood and Furniture 0.62 –1.11 0.06 0.01 0.00 0.18 1.49
7 Non-metallic 0.46 0.38 0.04 –0.10 –0.02 0.02 0.14
8 Primary Metal 1.00 0.64 0.04 –0.04 –0.04 –0.11 0.52
9 Fabricated Metal 1.60 0.46 0.11 0.03 –0.04 0.24 0.81
10 Machinery 2.97 –0.02 0.30 0.29 0.12 0.35 1.94
11 Computers 16.26 10.22 0.04 –0.24 –0.52 –0.43 7.18
14 Motor Vehicles 3.27 –0.18 0.04 0.11 0.08 0.31 2.92
15 Other Trans. Equipment –3.08 0.70 0.02 –0.05 –0.48 –1.69 –1.57
16 Misc. Manufacturing 1.24 –0.48 0.34 0.14 0.27 –0.55 1.52
17 Food and Tobacco 1.57 0.10 0.07 0.18 0.06 0.08 1.08
18 Textiles 1.13 0.57 0.08 0.04 0.07 –0.33 0.69
19 Paper and Allied 1.23 –0.65 0.08 0.32 0.14 0.08 1.26
20 Printing –0.16 –1.21 0.40 0.09 0.43 –0.01 0.14
Table 8 (cont’d)
Contributions
21 Chemicals 1.47 –0.14 0.18 0.45 0.22 –0.08 0.83

22 Petroleum Refining 0.28 –0.43 0.02 0.14 0.02 –0.05 0.58
24 Transportation 3.40 0.36 0.16 –0.01 0.28 1.10 1.51
25 Communications 3.76 0.13 0.99 0.70 0.35 –0.01 1.60
26 Electric Utilities 1.31 0.85 0.15 0.18 0.13 –0.23 0.22
27 Gas Utilities –2.59 –0.90 0.33 0.08 0.07 –0.06 -2.11
28 Wholesale Trade 3.72 0.91 0.76 0.27 0.36 0.25 1.17
29 Retail Trade 1.86 –0.18 0.13 0.40 0.11 0.57 0.83
30 FIRE 2.92 0.37 0.59 0.72 0.36 –0.06 0.94
32 Health Services 2.92 –1.49 0.26 0.39 1.19 1.04 1.53
34 Other Services 3.04 –0.53 0.15 0.64 0.34 0.62 1.82
Industry Group
Non-IT Industries 1.72 –0.35 0.13 0.19 0.37 0.38 1.01
111

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Table 9
Contributions
1 Agriculture 3.33 1.94 0.05 0.37 –0.34 0.25 1.07
2 Non-energy Mining 1.80 0.46 0.18 0.55 –0.30 –0.13 1.04
3 Coal Mining 0.80 3.57 0.18 0.08 –0.46 –1.47 –1.10
4 Crude Petroleum 1.10 0.98 0.18 0.39 –0.34 –0.04 –0.06
5 Construction 4.48 –0.95 0.12 0.41 0.18 1.49 3.23
7 Non-metallic 5.60 0.87 0.24 0.64 0.25 0.43 3.17
8 Primary Metal 3.04 2.50 0.08 0.13 0.07 0.00 0.27
10 Machinery 3.88 0.24 0.57 0.28 0.03 0.18 2.58
11 Computers 31.50 16.76 0.29 0.37 –0.09 0.07 14.10
14 Motor Vehicles 6.07 0.65 0.06 0.22 0.10 0.08 4.97
17 Food and Tobacco 1.52 0.01 0.12 0.33 0.03 0.03 1.00
18 Textiles –1.07 2.13 0.11 –0.03 –0.25 –1.23 –1.80
19 Paper and Allied 0.79 1.83 0.11 0.19 –0.04 –0.15 –1.14
20 Printing 1.97 0.56 0.80 0.13 0.09 –0.07 0.46
Table 9 (cont’d)
Contributions
21 Chemicals 2.20 0.50 0.26 0.51 0.07 0.04 0.82

22 Petroleum Refining 1.50 –3.71 0.01 –0.10 –0.07 –0.08 5.46
24 Transportation 2.81 –0.22 0.40 0.45 0.18 0.67 1.33
25 Communications 6.41 –1.20 1.84 0.90 0.52 0.59 3.76
27 Gas Utilities –0.65 0.33 0.34 0.34 –0.04 –0.26 -1.36
28 Wholesale Trade 4.16 0.08 1.41 0.55 0.24 0.43 1.45
29 Retail Trade 4.17 1.31 0.30 0.44 0.33 0.31 1.47
30 FIRE 5.26 0.01 1.18 1.00 0.44 0.17 2.45
32 Health Services 3.67 –1.07 0.57 0.53 1.37 0.57 1.71
34 Other Services 4.42 0.51 0.23 0.48 0.31 0.49 2.40
Industry Group
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Sources of Labour Productivity Growth at the Industry Level
Equation (3) shows the relationship between labour productivity growth and
MFP growth, capital deepening, labour quality change and intermediate input
deepening. The results on sources of labour productivity growth in Canadian in-
dustries reported in Tables 10 through 12 for the three periods: 1981-88, 1988-95,
and 1995-2000. Results for the United States are reported in Tables 13 through 15.
IT-producing Industries
The story that is familiar to many is the unprecedented rate of labour productiv-
ity growth in the computer equipment, and communications and electronic
equipment industries in all OECD countries. What may be less well known is
that labour productivity growth in our third IT-producing industry, communica-
tions, is a laggard in the United States but grew rapidly in Canada. Over the past
20 years, the average growth in labour productivity in these three industries was
7.8 percent in Canada and 9.8 percent in the United States. In the second half of
the 1990s, labour productivity in Canadian IT-producing industries increased at
an annual rate of 9.0 percent, compared to 12.8 percent in the United States.
These unprecedented growth rates were mainly due to MFP improvements and
intermediate input deepening. Over the period 1981-2000, the average MFP
growth in the three IT-producing industries in Canada was 2.3 percent per year
while in the United States it was 4.2 percent. The contribution from intermediate
input deepening was also sizable, 3.8 percentage points in Canada and 4.1 per-
centage points in the United States. The contributions from other factors such as
IT capital and university-labour were small. However, if we look across the three
major groups, IT-producing industries in both countries were the largest benefi-
ciaries of capital deepening, especially IT capital deepening.
In the 1980s, the IT-producing industries in Canada were enjoying productivity

growth rates similar to their U.S. counterparts, but Canada lagged the United
States in labour productivity growth in the 1990s, especially in the second half.
The labour productivity growth gap was entirely due to the stronger MFP per-
formance and intermediate input deepening in the United States.
114
Table 10
Sources of Labour Productivity Growth in Canadian Industries, 1981-88
Contributions
IT Non-IT University Non-university Intermediate
Capital Capital Labour Quality Labour Quality Input
Industry LP MFP Deepening Deepening Improvement Improvement Intensity

1 Agriculture 1.01 1.35 0.00 –0.51 0.03 0.09 0.03
3 Coal Mining 9.46 7.25 0.00 0.81 –0.02 0.06 1.36
4 Crude Petroleum –1.26 0.94 0.00 –1.30 0.05 0.03 –0.98
5 Construction –0.25 –0.01 0.03 –0.04 0.02 0.02 –0.26
6 Wood and Furniture 3.08 1.41 0.02 –0.19 0.05 0.03 1.76
7 Non-metallic 1.96 1.11 0.03 –0.56 0.06 0.09 1.23
8 Primary Metal 4.00 1.04 0.07 0.05 0.02 0.10 2.72
10 Machinery –0.92 –0.07 0.06 –0.57 0.07 0.09 –0.49
11 Computers 22.02 9.84 0.30 1.02 0.27 –0.02 10.59
14 Motor Vehicles 4.91 0.91 0.05 0.21 0.02 –0.04 3.76
16 Misc. Manufacturing 0.19 0.03 0.11 0.06 0.06 0.03 –0.10
17 Food and Tobacco 1.05 –0.21 0.03 –0.02 0.04 –0.01 1.22
18 Textiles 1.58 0.09 0.03 0.09 0.10 0.08 1.19
19 Paper and Allied 3.04 –0.13 0.04 0.58 0.03 0.10 2.42
20 Printing –0.02 –0.48 0.06 –0.22 –0.01 0.15 0.47
115
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Table 10 (cont’d)
Contributions
Non-IT University Non-university Intermediate
IT Capital Capital Labour Quality Labour Quality Input
21 Chemicals 1.99 1.02 0.05 –0.45 0.03 –0.02 1.35
22 Petroleum Refining 4.03 –1.44 0.03 0.09 0.00 0.03 5.33
23 Rubber and Plastics 1.71 0.69 0.09 0.11 –0.01 0.03 0.81
24 Transportation 2.55 1.61 0.08 –0.06 0.07 –0.04 0.88
25 Communications 4.86 2.42 0.72 0.33 0.23 0.08 1.08
26 Electric Utilities 3.02 1.14 0.61 0.10 0.10 0.03 1.04
27 Gas Utilities –1.07 –1.72 0.29 0.41 0.16 –0.04 –0.17
28 Wholesale Trade 4.27 2.80 0.12 0.08 0.27 0.02 0.98
29 Retail Trade 0.94 0.42 0.11 –0.01 0.18 0.05 0.19
30 FIRE 1.12 –1.13 0.37 0.80 0.18 –0.09 1.00
32 Health Services –2.28 –1.34 0.10 –0.90 –0.87 0.53 0.20
33 Education, Private –6.47 –2.99 0.38 –0.03 0.16 –0.31 –3.69
34 Other Services 0.18 –1.18 0.51 0.22 0.19 –0.07 0.51
Industry Group
IT-using Industries 1.16 0.01 0.24 0.22 0.28 –0.08 0.49
“LP” and “MFP” are the growth rates of labour productivity and multifactor productivity, respectively.
Table 11
Contributions

1 Agriculture 4.22 1.99 0.03 –0.20 0.14 0.06 2.19
2 Non-energy Mining 0.07 0.24 0.02 –0.34 0.14 –0.01 0.01
3 Coal Mining –0.39 1.26 0.02 –1.53 0.00 0.16 -0.30
4 Crude Petroleum 5.37 1.55 0.01 2.05 0.10 0.05 1.60
5 Construction –0.56 –0.66 0.02 0.16 0.10 0.13 -0.31
6 Wood and Furniture 1.64 –0.40 0.02 0.16 0.10 0.12 1.64
7 Non-metallic 0.58 –0.46 0.07 0.27 0.16 –0.06 0.61
8 Primary Metal 4.88 1.45 0.05 0.03 0.07 0.07 3.22
10 Machinery 4.15 1.17 0.09 0.36 0.15 0.01 2.36
11 Computers 21.70 3.43 0.13 0.29 0.16 0.04 17.64
14 Motor Vehicles 4.42 0.65 0.01 0.14 0.07 0.02 3.53
17 Food and Tobacco 1.98 0.28 0.08 0.07 0.12 0.02 1.40
18 Textiles 3.16 0.86 0.05 0.35 0.19 0.03 1.68
19 Paper and Allied 3.44 1.55 0.03 –0.26 0.10 0.07 1.96
20 Printing –1.08 –1.92 0.23 0.37 0.27 –0.08 0.05
117
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Table 11 (cont’d)
Contributions
21 Chemicals 2.67 0.77 0.12 0.43 0.23 –0.07 1.20
22 Petroleum Refining 3.84 0.52 0.05 –0.04 0.10 –0.02 3.23
24 Transportation 0.74 0.14 0.08 0.11 0.16 –0.05 0.30
25 Communications 4.44 0.60 1.56 0.90 0.39 –0.15 1.14
27 Gas Utilities –0.45 –0.84 0.22 –0.24 0.22 0.00 0.19
28 Wholesale Trade 1.86 0.53 0.19 0.06 0.45 –0.04 0.66
29 Retail Trade 1.30 –0.06 0.16 0.27 0.30 0.00 0.62
30 FIRE 2.65 0.72 0.32 0.39 0.44 –0.10 0.87
31 Business Services 1.35 –1.37 0.46 0.65 0.89 –0.28 1.00
32 Health Services –1.84 –0.21 0.07 –0.37 –1.04 0.08 -0.38
33 Education, Private –3.15 –2.50 0.14 –0.02 0.64 –0.42 -0.99
34 Other services 0.49 –0.58 0.18 0.09 0.25 –0.02 0.57
Industry Group
IT- producing Industries 8.26 1.39 1.07 0.73 0.41 –0.13 4.80
“LP” and “MFP” are growth rates of labour productivity and multifactor productivity, respectively.
Table 12
Contributions

1 Agriculture 7.06 2.12 0.08 0.98 0.12 0.07 3.70
2 Non-energy Mining –2.37 –0.86 0.04 –0.04 0.06 0.05 –1.62
3 Coal Mining 3.04 2.55 0.08 0.29 0.02 0.03 0.05
4 Crude Petroleum 2.72 –2.57 0.04 2.81 0.02 0.01 2.40
5 Construction 0.33 0.19 0.03 –0.08 0.05 0.06 0.07
6 Wood and Furniture 1.98 0.83 0.02 –0.14 0.03 –0.04 1.29
7 Non-metallic 2.95 1.85 0.05 –0.32 0.08 0.16 1.13
8 Primary Metal 3.33 0.96 0.03 0.10 0.02 0.01 2.21
10 Machinery –3.18 –1.20 0.12 –0.28 0.01 –0.03 –1.79
11 Computers 14.79 5.91 0.09 0.00 0.01 0.01 8.77
14 Motor Vehicles 3.22 1.23 0.03 –0.07 0.01 –0.04 2.05
16 Misc. Manufacturing 1.98 0.48 0.21 –0.13 0.02 –0.15 1.55
17 Food and Tobacco 0.80 –0.50 0.12 0.01 0.05 0.07 1.04
18 Textiles –0.47 –0.72 0.08 –0.19 0.10 0.10 0.17
19 Paper and Allied 0.96 0.28 0.07 0.43 0.02 0.04 0.12
20 Printing 0.34 –1.66 0.34 –0.31 0.10 0.01 1.86
119
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Table 12 (cont’d)
Contributions
21 Chemicals –1.30 0.18 0.10 –0.40 0.05 –0.06 –1.17
22 Petroleum Refining –3.51 –0.05 0.00 –0.11 0.01 0.01 –3.37
23 Rubber and Plastics 1.43 0.29 0.07 –0.19 0.06 0.03 1.17
24 Transportation 1.33 0.39 0.21 0.24 0.05 0.01 0.43
25 Communications 6.18 1.71 2.11 1.07 0.05 0.08 1.15
26 Electric Utilities 0.17 0.80 0.43 –1.62 0.01 0.02 0.53
27 Gas Utilities 3.45 –0.95 0.73 3.14 0.02 0.04 0.48
28 Wholesale Trade 1.59 0.85 0.29 –0.25 0.11 0.03 0.55
29 Retail Trade 4.28 1.86 0.37 0.22 0.12 –0.07 1.77
30 FIRE 3.33 0.96 0.54 –0.04 0.10 0.03 1.74
32 Health Services –2.11 –3.78 0.05 –0.45 2.06 –0.29 0.30
33 Education, Private 4.81 4.33 –0.02 –0.32 2.31 –0.08 –1.41
34 Other Services 3.27 0.97 0.27 –0.08 0.13 0.04 1.94
Industry Group
IT-using Industries 2.33 0.67 0.39 –0.13 0.23 –0.08 1.24
Non-IT Industries 1.86 0.30 0.11 –0.01 0.20 0.06 1.20
Table 13
Sources of Labour Productivity Growth in U.S. Industries, 1981-88
Contributions

1 Agriculture 2.29 1.63 0.01 0.06 0.19 0.06 0.35
3 Coal Mining 8.51 3.29 0.01 1.09 0.18 0.21 3.74
4 Crude Petroleum 4.95 0.28 0.14 4.00 0.13 0.03 0.37
5 Construction –0.11 –0.14 0.00 –0.30 0.11 0.04 0.18
6 Wood and Furniture 1.81 1.35 0.02 –0.26 0.09 0.12 0.49
7 Non-metallic 2.43 1.24 0.02 –0.06 0.15 0.06 1.01
8 Primary Metal 3.02 0.83 0.05 0.25 0.08 0.03 1.78
10 Machinery 1.19 –0.77 0.25 0.41 0.27 –0.04 1.06
11 Computers 20.83 11.53 0.09 –0.15 0.67 –0.45 9.14
12 Electrical Equipment 3.96 1.21 0.20 0.08 0.53 –0.34 2.29
14 Motor Vehicles 4.85 0.79 0.03 –0.13 0.03 –0.05 4.17
17 Food and Tobacco 2.61 1.04 0.07 0.22 0.06 –0.05 1.26
18 Textiles 3.38 0.71 0.05 0.18 0.18 –0.02 2.28
19 Paper and Allied 2.00 0.20 0.05 0.21 0.14 –0.01 1.41
20 Printing 1.26 –0.43 0.32 0.08 0.39 –0.32 1.21
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Table 13 (cont’d)
Contributions
21 Chemicals 1.46 0.78 0.12 0.12 0.29 –0.19 0.35
22 Petroleum Refining 5.00 3.76 0.01 0.19 0.05 –0.03 1.01
23 Rubber and Plastics 3.40 1.69 0.06 –0.06 0.17 –0.04 1.59
24 Transportation 1.31 0.82 0.05 –0.39 0.47 –0.32 0.67
25 Communications 2.91 –0.35 0.95 0.96 0.33 –0.20 1.21
26 Electric Utilities 1.62 –0.60 0.43 0.96 0.17 –0.08 0.73
27 Gas Utilities –3.10 –3.76 0.15 0.34 0.04 –0.02 0.15
28 Wholesale Trade 3.42 1.89 0.69 0.59 0.11 –0.07 0.21
29 Retail Trade 0.81 –0.14 0.21 0.12 0.23 –0.07 0.47
30 FIRE 1.39 –0.75 0.49 0.54 0.28 –0.17 1.00
31 Business Services –1.73 –1.43 1.54 –0.83 0.14 –0.16 –1.00
32 Health Services 0.41 –0.48 0.37 0.22 0.40 –0.08 –0.03
33 Education, Private 0.52 –1.03 0.03 0.02 1.06 –0.39 0.84
34 Other Services 0.37 0.19 0.03 –0.06 0.17 –0.22 0.26
Industry Group
IT-using Industries 1.19 –0.08 0.52 0.30 0.31 –0.29 0.44
Table 14
Contributions

1 Agriculture 2.74 1.67 0.03 0.08 0.35 –0.08 0.69
2 Non–energy Mining 1.91 1.09 0.18 0.05 0.25 –0.06 0.41
3 Coal Mining 5.17 3.40 0.16 0.77 0.24 0.05 0.55
4 Crude Petroleum 0.88 0.20 0.08 0.01 0.28 –0.09 0.39
5 Construction –1.54 –1.33 0.06 0.02 0.07 0.08 –0.43
6 Wood and Furniture 0.45 –1.11 0.06 0.00 –0.01 0.16 1.36
7 Non–metallic 0.95 0.38 0.05 –0.07 0.01 0.19 0.40
8 Primary Metal 2.12 0.64 0.04 0.06 0.00 0.08 1.30
9 Fabricated Metal 1.28 0.46 0.10 –0.02 –0.05 0.16 0.63
10 Machinery 2.33 –0.02 0.28 0.26 0.06 0.15 1.61
11 Computers 19.91 10.22 0.07 –0.10 0.03 –0.01 9.70
14 Motor Vehicles 1.19 –0.18 0.03 –0.01 0.04 0.03 1.28
17 Food and Tobacco 1.14 0.10 0.07 0.12 0.05 0.01 0.78
18 Textiles 2.89 0.57 0.09 0.18 0.15 0.07 1.83
19 Paper and Allied 0.94 –0.65 0.08 0.27 0.13 0.03 1.08
20 Printing –0.39 –1.21 0.39 0.06 0.40 –0.07 0.04
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Table 14 (cont’d)
Contributions
21 Chemicals 1.60 –0.14 0.18 0.48 0.23 –0.07 0.90
22 Petroleum Refining 1.42 –0.43 0.03 0.22 0.05 –0.01 1.57
24 Transportation 0.26 0.36 0.12 –0.38 0.04 0.15 –0.02
25 Communications 2.96 0.13 0.84 0.58 0.29 –0.12 1.25
27 Gas Utilities –2.06 –0.90 0.35 0.17 0.08 –0.03 –1.74
28 Wholesale Trade 3.04 0.91 0.72 0.19 0.27 0.03 0.93
29 Retail Trade 0.60 –0.18 0.12 0.26 –0.01 0.11 0.31
30 FIRE 2.48 0.37 0.58 0.56 0.30 –0.11 0.79
31 Business Services 1.35 0.54 0.26 0.01 –0.52 0.27 0.79
32 Health Services –0.72 –1.49 0.19 –0.05 0.10 0.16 0.37
33 Education, Private –0.90 –1.09 0.04 –0.05 0.32 0.01 –0.13
34 Other Services 1.11 –0.53 0.13 0.37 0.21 –0.03 0.96
Industry Group
Non-IT Industries –0.02 –0.35 0.11 –0.04 0.18 0.00 0.09
Table 15
Contributions

1 Agriculture 3.23 1.94 0.05 0.36 –0.35 0.23 1.01
2 Non-energy Mining 3.26 0.46 0.20 0.91 –0.25 0.20 1.74
3 Coal Mining 7.49 3.57 0.25 2.14 –0.25 0.27 1.51
4 Crude Petroleum 2.72 0.98 0.20 0.89 –0.24 0.15 0.74
5 Construction –0.14 –0.95 0.09 0.14 –0.07 0.06 0.60
7 Non-metallic 4.18 0.87 0.23 0.43 0.17 0.04 2.43
8 Primary Metal 3.20 2.50 0.08 0.15 0.08 0.02 0.38
10 Machinery 3.43 0.24 0.56 0.23 0.01 0.05 2.35
11 Computers 31.10 16.76 0.29 0.36 –0.13 0.03 13.81
12 Electrical Equipment 4.17 0.94 0.10 –0.31 0.12 0.00 3.33
14 Motor Vehicles 5.01 0.65 0.06 0.13 0.08 –0.04 4.13
17 Food and Tobacco 1.50 0.01 0.12 0.32 0.03 0.03 0.98
18 Textiles 5.05 2.13 0.16 0.45 0.09 0.05 2.17
19 Paper and Allied 1.94 1.83 0.12 0.36 0.03 0.05 –0.45
20 Printing 2.08 0.56 0.81 0.14 0.10 –0.04 0.51
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Table 15 (cont’d)
Contributions
21 Chemicals 2.28 0.50 0.26 0.53 0.08 0.04 0.87
22 Petroleum Refining 4.12 –3.71 0.01 0.13 0.00 0.01 7.69
23 Rubber and Plastics 2.70 1.51 0.19 0.45 0.06 –0.02 0.51
24 Transportation 0.50 –0.22 0.35 0.16 0.01 0.02 0.18
25 Communications 1.54 –1.20 1.03 0.17 0.10 –0.11 1.54
27 Gas Utilities 2.85 0.33 0.48 0.94 0.06 –0.06 1.08
28 Wholesale Trade 2.78 0.08 1.32 0.38 0.01 0.03 0.95
29 Retail Trade 2.59 1.31 0.28 0.25 0.17 –0.22 0.80
30 FIRE 2.75 0.01 1.05 0.09 0.12 –0.07 1.55
31 Business Services 1.62 –1.38 1.33 0.11 –0.08 0.03 1.62
32 Health Services 0.93 –1.07 0.50 0.23 0.47 0.00 0.80
33 Education, Private –0.78 –1.55 0.07 –0.01 0.71 –0.07 0.08
34 Other Services 2.20 0.51 0.20 0.13 0.19 –0.22 1.39
Industry Group
IT-using Industries
In the 1980s, IT using industries, on average, had an equal (in Canada) or higher
(in the United States) labour productivity growth than non-IT industries. How-
ever, the difference between the two groups increased in the 1990s when labour
productivity growth in the IT-using group accelerated. In the United States, la-
bour productivity growth in IT-using industries rose from 1.2 percent per year
during 1981-88 to 1.5 percent (1988-95) and 2.6 percent (1995-2000). In Canada the
pattern is the same, from 1.2 percent during 1981-88 to 1.8 percent (1988-95) and
2.3 percent (1995-2000), but less pronounced.
The acceleration of labour productivity growth in these industries in the United

States in the second half of the 1990s was due to IT capital, university labour and
intermediate input deepening. On the other hand, in Canada it was due to an
increase in MFP growth, intermediate input and IT capital deepening. In both
countries, IT-using industries benefited more than non-IT industries from IT
capital deepening in the second half of the 1990s.
In the first half of the 1990s, labour productivity in the Canadian IT-using indus-
tries grew at an annual rate of 1.8 percent which was a bit faster than the
1.5 percent in the United States. This difference was mainly due to a greater in-
crease in university labour input intensity in Canada. However, this was re-
versed in the second half of the 1990s when the U.S. IT-using industries saw a
higher productivity growth rate. This was mainly due to an accelerated IT capital
contribution in the United States. Of the 2.6 percent growth rate of labour pro-
ductivity, IT capital deepening contributed 0.9 percentage points, while in Canada
it contributed 0.4 percentage points out of 2.3 percent.
Aggregate Growth and Sector Contributions
Sources of Aggregate Output (Value-added) Growth
We now turn to the economy as a whole. The growth in value added for the en-
tire business sector, aggregated over the 34 industries, is given in Equations (4)
and (5). This bottom-up result is given in the first row of Table 16. These esti-
mates are generally consistent with those estimates of Statistics Canada that
come from a top-down approach.23 These two estimates are reported in the bot-
tom part of Table 16, under "Addendum". The difference between the two esti-
mates, labelled as reallocation of value added, is relatively small.
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Table 16
Sources of Aggregate Value-added Growth in Canada and the United States

1981-88 1988-95 1995-2000 1981-88 1988-95 1995-2000
Contributions
Value Added 3.28 1.82 5.00 3.62 2.38 4.54
Capital Input 1.27 0.81 1.62 1.55 1.09 2.13
IT 0.35 0.33 0.58 0.61 0.52 1.15
Non-IT 0.92 0.48 1.04 0.94 0.57 0.98
Labour Input 1.36 0.56 2.28 1.49 1.15 1.60
University 0.45 0.57 0.87 0.93 0.60 0.82
Non-university 0.91 –0.01 1.41 0.56 0.55 0.78
MFP 0.65 0.45 1.11 0.58 0.14 0.81
Growth Rates
Value Added 3.28 1.82 5.00 3.62 2.38 4.54
Capital Input 3.21 2.14 4.10 4.53 3.20 5.97
IT 15.86 12.69 17.25 19.60 11.32 20.11
Non-IT 2.48 1.34 2.87 3.01 1.93 3.27
Labour Input 2.28 0.92 3.79 2.27 1.74 2.49
University 5.76 4.71 6.18 5.01 2.67 3.47
Non-university 1.79 0.03 3.06 1.24 1.28 1.91
MFP 0.65 0.45 1.11 0.58 0.14 0.81
Addendum
Bottom-up 3.28 1.82 5.00 3.62 2.38 4.54
Top-down 3.25 1.50 4.86 3.70 2.61 4.55
Reallocation of Value Added 0.03 0.32 0.14 -0.08 –0.23 –0.05
Hours worked 1.95 0.27 3.06 2.00 1.41 2.23
Economic growth accelerated in the second half of the 1990s in both countries.
The acceleration was more pronounced in Canada, from 1.8 percent per year to
5.0 percent, versus 2.4 percent to 4.5 percent for the United States. In the 1980s,
however, the Canadian business sector grew at 3.3 percent compared to 3.6 percent
in the United States.
The more sizable differences are in factor contributions. The largest contributor
in Canada during the boom period (1995-2000) was labour, which accounted for
2.3 out of the 5.0 percentage points, while capital contributed only 1.6 percentage
points. On the other side of the border, capital and labour contributed 2.1 and
1.6 percentage points to the 4.5 percent aggregate growth rate, respectively. The
difference in IT capital contribution is even more pronounced. The extremely
rapid growth in IT investment in the United States produced a 1.2 percentage
point contribution, while, in Canada, it was only 0.6 percentage points. The dif-
ference in labour contribution is entirely due to the higher growth rate of non-
university educated labour in Canada. We should note, however, that the less-
educated labour force expanded greatly during the boom period in both coun-
tries. In sum, the acceleration of value-added growth in Canada in the second
half of the 1990s was mainly driven by non-IT capital and non-university labour
while in the United States, it was mainly due to the accumulation of both IT and
non-IT capital as well as an increase in MFP growth (Figure 1).
We now turn to Equation (4) for estimating individual industry contributions to

aggregate growth. An industry contribution is the product of its share in total
value added and its value-added growth rate. Industry shares in total value added
are displayed in Table 17. As before, we concentrate on the three industry groups:
IT-producing, IT-using, and non-IT industries. In both countries, the value-added
share of the IT-producing group was essentially flat over the period 1981-2000,
while the share of the IT-using group increased at the expense of the non-IT group.
This is essentially due to the expansion of FIRE and business services industries,
with contraction in mining, construction and agriculture. In recent years, the
Canadian economy is concentrated relatively less in IT-producing and IT-using
industries and more in non-IT industries, compared to the United States.
Figure 2 gives the contributions of three major groups to aggregate output

growth, while Figures 6 through 8 give the contributions of each of the 34 indus-
tries for the three sub-periods: 1981-88, 1988-95, and 1995-2000. All three groups
contributed to the acceleration of output growth in both countries from the first
half to the second half of the 1990s. Nevertheless, most of the acceleration in Can-
ada was from non-IT industries, while in the United States it was mainly from IT-
using industries.
129
Ho, Rao & Tang
Figure 1
Sources of the Accelaration in Aggregate Value-added Growth

Between 1988-1995 and 1995-2000
______________________________________________________________________________
0.66
MFP
Non-univ. Labour
1.42 0.67
University Labour
Non-IT Capital
IT Capital 0.23
0.22
0.30
0.41
0.56
0.63
0.25
Figure 2
Industry Contributions to Aggregate Value-added Growth in

Canada and the United States, 1981-2000
____________________________________________________________________________
IT-producing
IT-using
Non-IT
2.16 1.56
1.53
1.68
0.76 2.07
0.59 2.39
1.67
1.30 1.17
1.01
0.91
0.29 0.42 0.22 0.45 0.44
Canada United Canada United Canada United
States States States
1981-1988 1988-1995 1995-2000
Note: IT producing industries are computer, electronic equipment and communications.

IT-intensive using industries are machinery, electrical equipment, printing and publishing, other
transportation equipment, miscellaneous manufacturing, wholesale trade, retail trade, finance, in-
surance and real estate, and business services.
130
Figure 3
Sources of the Acceleration in Aggregate Labour Productivity Growth

between 1988-1995 and 1995-2000
______________________________________________________________________________
MFP
Non-univ. Labour
Quality Improvement
University Labour
0.67
Quality Improvement
Non-IT Capital
Deepening
IT Capital Deepening 0.02
0.66 0.16
0.57
0.13
0.16
-0.07
–0.44
–0.10
Canada United
States
Figure 4
Industry Contributions to Aggregate Labour Productivity Growth in

_____________________________________________________________________________
IT-producing
IT-using
Non-IT
0.79
0.79
1.01
0.67 0.01 0.93
0.62
0.80 0.87
0.56
0.72
0.43 0.73
0.44 0.45 0.42
0.24 0.23
1981-1988 1988-1995 1995-2000
Note: Labour productivity is defined as value added per hour.

IT producing industries are computer, electronic equipment and communications.
transportation equipment, miscellaneous manufacturing, wholesale trade, retail trade, finance,
insurance and real estate, and business services.
131
Ho, Rao & Tang
Figure 5
Industry Contributions to Aggregate MFP Growth in Canada and the

United States, 1981-2000
______________________________________________________________________________
IT-producing
IT-using
Non-IT 0.38
0.11
0.10
0.34 0.18
0.47
0.49
0.25 0.60
0.00 0.30 0.11 0.33
0.17 0.24
0.10
–0.06
–0.38

1981-1988 1988-1995 1995-2000
Note: IT producing industries are computer, electronic equipment and communications.

transportation equipment, miscellaneous manufacturing, wholesale trade, retail trade, finance,
insurance and real estate, and business services.
If we examine detailed industry contributions in Figures 6 through 8, we see that

the top four contributors to aggregate growth in Canada during the boom period
are all IT-using industries — business services, FIRE, wholesale trade, and retail
trade. In the United States the top three are FIRE, business services, communica-
tion and electronic equipment, while the fourth highest is a non-IT industry,
health services.
Table 18 gives the change in hours worked for the 34 industries during the three
periods. During 1995-2000, Canada has higher employment growth than the
United States in almost all sectors, the main exceptions being communications,
agriculture, construction and FIRE.
132
Figure 6
Contributions to Aggregate Value-added Growth by Industry in

_____________________________________________________________________________
WholesaleTrade
Crude Petroleum
FIRE
Business Services
Retail Trade
Transportation
Motor Vehicles
Communications
Other Services
Construction
Wood and Furniture
Electric Utilities
Health Services
Agriculture
Computers
Chemicals
Non-energy Mining
Electronic Equip.
Rubber and Plastics
Primary Metal
Coal Mining
Printing Canada
Paper and Allied United States
Fabricated Metal
Non-metallic
Misc. Manuf.
Textiles
Gas Utilities
Education, Private
Electrical Equip.
Machinery
Other Trans. Equip.
Food and Tobacco
Petroleum Refining
–0.2 –0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6
Sources of Aggregate Labour Productivity Growth
The results on sources of aggregate labour productivity, as described in Equation

(9), are reported in Table 19. In the second half of 1990s, aggregate labour pro-
ductivity in Canada grew at an annual rate of 1.9 percent, compared to 2.3 per-
cent in the United States. In Canada, the largest contributor was MFP growth,
1.1 percentage points, with a modest 0.4 percent each for capital deepening and
labour quality. In the United States, the sources of improvements in labour pro-
ductivity were different: IT-capital deepening alone accounted for 1.0 percentage
points out of the 2.3 percent while the contribution from labour was held back by
the surge in employment of less educated workers. Both countries saw a revival
of MFP growth. MFP growth contributed 0.8 percentage points to the U.S. labour
productivity growth. IT capital contributed more than non-IT capital in both
countries, and university labour contributed more than non-university labour.
133
Ho, Rao & Tang
Figure 7

_________________________________________________________________________
FIRE
Wholesale Trade
Business Services
Communications
Transportation
Motor Vehicles
Retail Trade
Crude Petroleum
Agriculture
Other Services
Health services
Electronic Equip.
Chemicals
Machinery
Electric Utilities
Primary Metal
Paper and Allied
Rubber and Plastics
Computers
Food and Tobacco
Gas Utilities
Other Trans. Equip. Canada
Petroleum Refining United States
Misc. Manuf.
Education, Private
Coal Mining
Non-energy Mining
Wood and Furniture
Fabricated Metal
Textiles
Electrical Equip.
Non-metallic
Printing
Construction
–0.2 –0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6
The acceleration of aggregate labour productivity growth in Canada in the latter

half of the 1990s was mainly due to the serge in MFP growth by 0.7 percentage
points (Figure 3). The labour productivity growth in the United States acceler-
ated dramatically, from 1.0 percent in the first half to 2.3 percent per year in the
second half of the 1990s. Greater IT-capital deepening and the increased MFP
growth contributed equally to the acceleration of labour productivity growth.
Furthermore, non-IT capital deepening did not slow down as in Canada.
Equation (10) shows how aggregate labour productivity growth is made up of in-
dustry contributions and reallocation of hours. The contributions of three major
industry groups are summarized in Figure 4. The acceleration of aggregate labour
productivity growth in Canada in the second half of the 1990s was driven mainly by
IT-producing industries and to a lesser extent, by IT-using and non-IT industries.
134
Figure 8

__________________________________________________________________________
Business Services
FIRE
Wholesale Trade
Retail Trade
Other Services
Motor Vehicles
Construction
Transportation
Communications
Electronic Equip.
Wood and Furniture
Agriculture
Health Services
Fabricated Metal
Primary Metal
Crude Petroleum
Computers
Chemicals
Paper and Allied
Rubber and Plastics
Education, Private
Other trans. Equip. Canada
Food and Tobacco United States
Non-metallic
Non-energy Mining
Misc. Manuf.
Electrical Equip.
Machinery
Printing
Petroleum Refining
Gas Utilities
Textiles
Electric Utilities
Coal Mining
–0.2 0.0 0.2 0.4 0.6 0.8
In the United States, the acceleration was mainly driven by the increased con-
tribution from non-IT industries. However, most of the increased contribution
was the recovery of the drop in the first half of the 1990s from that in 1980s.
Unlike non-IT industries, the contribution from both IT-producing and IT-using
industries accelerated over those three periods in both countries.
135
136
Ho, Rao & Tang

Table 17
Industry Shares of Value Added in Canada and the United States

Industry 1981 1988 1995 2000 1981 1988 1995 2000
1 Agriculture 0.044 0.029 0.028 0.020 0.035 0.024 0.024 0.025
2 Non-energy Mining 0.030 0.028 0.020 0.016 0.005 0.003 0.003 0.002
3 Coal Mining 0.002 0.003 0.002 0.001 0.007 0.004 0.003 0.002
4 Crude Petroleum 0.059 0.029 0.031 0.034 0.048 0.015 0.010 0.009
5 Construction 0.101 0.087 0.067 0.068 0.068 0.065 0.052 0.053
6 Wood and Furniture 0.026 0.026 0.029 0.031 0.011 0.012 0.011 0.010
7 Non-metallic 0.008 0.009 0.006 0.006 0.009 0.008 0.006 0.007
8 Primary Metal 0.019 0.019 0.016 0.016 0.014 0.010 0.009 0.008
9 Fabricated Metal 0.017 0.015 0.013 0.015 0.021 0.016 0.015 0.016
10 Machinery 0.015 0.013 0.015 0.015 0.031 0.020 0.020 0.020
11 Computers 0.002 0.003 0.001 0.001 0.007 0.006 0.005 0.005
12 Electrical Equipment 0.010 0.008 0.006 0.005 0.012 0.010 0.008 0.008
13 Electronic Equipment 0.006 0.008 0.009 0.011 0.011 0.012 0.014 0.017
14 Motor Vehicles 0.017 0.024 0.030 0.028 0.011 0.011 0.011 0.010
15 Other Trans. Equipment 0.010 0.008 0.011 0.011 0.018 0.016 0.013 0.011
16 Misc. Manufacturing 0.007 0.007 0.007 0.007 0.020 0.020 0.018 0.016
17 Food and Tobacco 0.032 0.032 0.032 0.030 0.026 0.026 0.025 0.022
18 Textiles 0.017 0.014 0.011 0.010 0.017 0.012 0.009 0.007
19 Paper and Allied 0.022 0.025 0.027 0.017 0.011 0.011 0.011 0.009
20 Printing 0.013 0.015 0.014 0.014 0.017 0.019 0.017 0.017
21 Chemicals 0.017 0.023 0.023 0.018 0.027 0.025 0.025 0.023
22 Petroleum Refining 0.005 0.003 0.003 0.002 0.007 0.005 0.004 0.004
Table 17 (cont’d)
Industry Shares of Value Added in Canada and the United States

Industry 1981 1988 1995 2000 1981 1988 1995 2000
23 Rubber and Plastics 0.007 0.007 0.009 0.009 0.009 0.010 0.011 0.010
24 Transportation 0.066 0.061 0.061 0.062 0.045 0.040 0.039 0.033
25 Communications 0.029 0.029 0.031 0.027 0.027 0.027 0.027 0.029

26 Electric Utilities 0.031 0.037 0.040 0.033 0.024 0.026 0.024 0.021
27 Gas Utilities 0.004 0.005 0.005 0.004 0.006 0.006 0.004 0.003
28 Wholesale Trade 0.059 0.070 0.070 0.072 0.076 0.071 0.070 0.067
29 Retail Trade 0.078 0.082 0.072 0.077 0.092 0.089 0.085 0.083
30 FIRE 0.110 0.125 0.137 0.142 0.118 0.149 0.159 0.166
31 Business Services 0.042 0.054 0.063 0.083 0.034 0.056 0.067 0.084
32 Health Services 0.023 0.029 0.033 0.032 0.092 0.125 0.145 0.145
33 Education, Private 0.001 0.001 0.001 0.003 0.007 0.008 0.009 0.010
34 Other Services 0.070 0.074 0.077 0.077 0.038 0.044 0.048 0.049
Industry Group
IT-producing Industries 0.038 0.039 0.041 0.040 0.044 0.045 0.046 0.051
IT-using Industries 0.344 0.382 0.394 0.427 0.417 0.449 0.457 0.472
Non-IT Industries 0.618 0.579 0.565 0.533 0.539 0.506 0.497 0.477
Total 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
137
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Ho, Rao & Tang

Table 18
Growth in Hours Worked in Canadian and U.S. Industries, 1981-2000

Industry 1981-88 1988-95 1995-2000 1981-88 1988-95 1995-2000
1 Agriculture –0.13 –1.07 –3.52 –1.53 –0.01 0.10
2 Non-energy Mining –2.21 –0.03 3.13 –3.92 0.42 –1.47
3 Coal Mining –0.50 0.08 –4.69 –6.41 –4.03 –6.69
4 Crude Petroleum 5.26 –1.83 1.68 –7.40 –2.15 –1.61
5 Construction 1.82 –1.26 3.29 3.42 0.89 4.62
6 Wood and Furniture 1.83 –0.88 3.37 2.34 0.17 1.33
7 Non-metallic 0.30 –3.59 2.15 –0.31 –0.49 1.43
8 Primary Metal –1.84 –3.43 1.42 –4.91 –1.12 –0.16
9 Fabricated Metal 0.23 –1.55 4.72 –1.01 0.32 1.28
10 Machinery 1.64 –0.88 4.91 –2.94 0.64 0.45
11 Computers 1.47 –1.90 1.73 1.60 –3.66 0.40
12 Electrical Equipment –2.20 –6.16 3.15 –1.52 –1.32 –0.61
13 Electronic Equipment 4.48 –1.40 3.93 0.81 –0.86 2.37
14 Motor Vehicles 4.88 0.42 4.74 1.73 2.08 1.06
15 Other Trans. Equipment –0.13 –2.00 3.54 2.01 –5.10 0.50
16 Misc. Manufacturing 1.53 –1.38 3.57 0.55 –1.63 0.08
17 Food and Tobacco –0.01 –1.38 2.07 –0.78 0.43 0.03
18 Textiles –0.29 –5.09 1.77 –2.01 –1.76 –6.12
19 Paper and Allied –0.46 –2.15 0.87 0.72 0.29 –1.15
20 Printing 3.28 –1.21 3.55 2.90 0.22 –0.10
21 Chemicals 0.91 –1.23 3.54 –0.29 –0.13 –0.08
22 Petroleum Refining –6.06 –2.77 6.27 –2.91 –1.14 –2.61
Table 18 (cont’d)
Growth in Hours Worked in Canadian and U.S. Industries, 1981-2000

Industry 1981-88 1988-95 1995-2000 1981-88 1988-95 1995-2000
23 Rubber and Plastics 3.45 0.16 4.79 2.39 1.86 0.75
24 Transportation 1.08 1.44 2.45 2.08 3.14 2.31
25 Communications 0.53 0.26 –0.49 –1.41 0.80 4.87

26 Electric Utilities 0.55 1.40 0.50 0.62 –1.12 –2.35
27 Gas Utilities 2.56 3.56 –2.47 –1.64 –0.53 –3.50
28 Wholesale Trade 1.74 1.34 5.12 1.52 0.69 1.39
29 Retail Trade 2.39 0.46 1.22 2.42 1.25 1.58
30 FIRE 2.27 0.72 1.66 3.06 0.44 2.50
31 Business Services 5.24 2.80 8.77 7.90 4.03 6.53
32 Health Services 7.01 3.80 6.66 3.66 3.64 2.75
33 Education, Private 8.31 4.83 17.54 2.83 2.75 3.65
34 Other Services 2.83 1.14 2.11 3.44 1.92 2.22
Industry Group
IT-producing Industries 1.69 –0.40 1.02 –0.14 –0.52 3.43
IT-using Industries 2.54 0.81 3.95 2.59 1.13 2.43
Non-IT Industries 1.56 –0.08 2.45 1.62 1.74 2.00
Aggregate 1.95 0.27 3.06 2.00 1.41 2.23
Note: IT-producing industries are computer, electronic (including communication) equipment and communications (services). IT-using indus-
tries are machinery, electrical equipment, printing and publishing, other transportation equipment, miscellaneous manufacturing, whole-
sale trade, retail trade, finance, insurance and real estate, and business services. Non-IT industries are the remaining industries.
139
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Ho, Rao & Tang

Table 19
Sources of Aggregate Labour Productivity Growth in Canada and the United States

1981-88 1988-95 1995-2000 1981-88 1988-95 1995-2000
Contributions
Labour Productivity 1.33 1.55 1.93 1.62 0.97 2.31
Capital Deepening 0.48 0.69 0.41 0.87 0.60 1.34
IT 0.30 0.32 0.48 0.54 0.45 1.02
Non-IT 0.18 0.37 –0.07 0.33 0.15 0.31
Labour Quality Improvement 0.20 0.41 0.43 0.18 0.22 0.17
University 0.29 0.54 0.44 0.54 0.28 0.30
Non-university –0.09 –0.13 0.00 –0.36 –0.06 –0.13
MFP 0.65 0.45 1.11 0.58 0.14 0.81
Growth Rates
Capital Deepening 1.26 1.87 1.04 2.53 1.79 3.74
IT 13.91 12.42 14.18 17.60 9.91 17.88
Non-IT 0.53 1.07 –0.19 1.02 0.52 1.04
Labour Quality Improvement 0.33 0.64 0.72 0.27 0.34 0.26
University 3.80 4.43 3.11 3.01 1.27 1.24
Non-university –0.16 –0.25 0.00 –0.75 –0.13 –0.32
MFP 0.65 0.45 1.11 0.58 0.14 0.81
Addendum
Industry Contribution 1.30 1.62 2.08 2.01 1.26 2.46
Reallocation of Hours 0.03 –0.08 –0.15 –0.39 –0.29 –0.15
Note: Aggregate labour productivity is defined as aggregate value added per hour worked.
In Figures 9 through 11, we give the contributions for all 34 industries. In the
1980s the top five contributors to Canadian aggregate labour productivity
growth were: wholesale trade; transportation; communications; non-energy min-
ing; and motor vehicles. By the late 1990s, the top sectors were FIRE, retail trade,
communications, agriculture and other services. Health services was the big lag-
gard in all periods. The industry picture in the United States is somewhat differ-
ent where the biggest contributors to the productivity revival were: communica-
tion and electronic equipment; computers; FIRE; retail trade; and wholesale
trade.
Figure 9
Contributions to Aggregate Labour Productivity Growth by Industry in

_____________________________________________________________________________
Wholesale Trade
Transportation
Communications
Non-energy Mining
Motor Vehicles
Electric Utilities
Agriculture
Retail Trade
Wood and Furniture
Primary Metal
Computers
Chemicals
Coal Mining
Business Services
Paper and Allied
Fabricated Metal
Electrical Equip.
Electronic Equip.
Construction
Rubber and Plastics
Textiles
FIRE Canada
Non-metallic
Misc. Manuf. United States
Gas Utilities
Education, Private
Other Trans. Equip.
Machinery
Printing
Food and Tobacco
Other Services
Crude Petroleum
Health Services
Petroleum Refining
–0.2 –0.1 0.0 0.1 0.2 0.3 0.4
Note: Labour productivity is defined as value added per hour worked.
141
Ho, Rao & Tang
Figure 10

_____________________________________________________________________________
FIRE
Crude Petroleum
Communications
Agriculture
Wholesale Trade
Motor Vehicles
Primary Metal
Retail Trade
Chemicals
Paper and Allied
Electronic Equip.
Food and Tobacco
Transportation
Machinery
Textiles
Business Services
Other trans. equip.
Computers
Rubber and Plastics
Petroleum Refining
Electrical Equip.
Misc. Manuf. Canada
Fabricated Metal
Wood and Furniture United States
Coal Mining
Non-energy Mining
Non-metallic
Gas Utilities
Education, private
Electric Utilities
Other Services
Printing
Construction
Health Services
–0.3 –0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5
Sources of Aggregate MFP Growth
Aggregate MFP growth accelerated in both countries in the latter half of the
1990s. In Canada, it increased from 0.5 percent per year during 1988-95 and
1.1 percent during 1995-2000. In the United States, it increased from 0.1 to
0.8 percent.24
142
Figure 11

_____________________________________________________________________________
FIRE
Retail Trade
Communications
Agriculture
Other Services
Motor Vehicles
Business Services
Electronic Equip.
Wholesale Trade
Transportation
Computers
Primary Metal
Wood and Furniture
Paper and Allied
Construction
Non-metallic
Crude Petroleum
Gas Utilities
Fabricated Metal
Education, Private
Electrical Equip.
Coal Mining Canada
Other trans. Equip.
Misc. Manuf.
United States
Rubber and Plastics
Chemicals
Petroleum Refining
Electric Utilities
Textiles
Food and Tobacco
Non-energy Mining
Printing
Machinery
Health Services
–0.2 –0.1 0.0 0.1 0.2 0.3 0.4 0.5
We now look at individual industry contributions to aggregate MFP growth.

According to the Domar weighting scheme, shown in Equation (12), each indus-
try contribution is calculated as the product of its MFP growth and the Domar
weight. The Domar weights, essentially industry gross output divided by aggre-
gate gross domestic product, are given in Table 20. Sectors with the biggest Domar
weights are FIRE, other services, construction, and motor vehicles. In Figure 5,
we summarize the contributions of the three major industry groups, and in Fig-
ures 12 through 14 we give the contributions of all 34 industries.
143
144
Ho, Rao & Tang

Table 20
Domar Weights in Canadian and U.S. Industries, 1982-2000

Industry 1982 1988 1995 2000 1982 1988 1995 2000
1 Agriculture 0.094 0.067 0.065 0.054 0.093 0.057 0.051 0.057
2 Non-energy Mining 0.048 0.041 0.033 0.027 0.047 0.005 0.005 0.028
3 Coal Mining 0.004 0.004 0.003 0.002 0.004 0.007 0.004 0.002
4 Crude Petroleum 0.074 0.046 0.046 0.053 0.076 0.031 0.020 0.054
5 Construction 0.237 0.212 0.173 0.156 0.232 0.151 0.122 0.166
6 Wood and Furniture 0.059 0.067 0.075 0.076 0.058 0.030 0.029 0.080
7 Non-metallic 0.018 0.019 0.013 0.013 0.018 0.016 0.013 0.014
8 Primary Metal 0.064 0.061 0.056 0.049 0.063 0.034 0.030 0.052
9 Fabricated Metal 0.044 0.039 0.031 0.034 0.043 0.039 0.034 0.036
10 Machinery 0.032 0.028 0.031 0.031 0.031 0.041 0.042 0.032
11 Computers 0.006 0.007 0.011 0.007 0.005 0.018 0.017 0.008
12 Electrical Equipment 0.024 0.021 0.015 0.014 0.024 0.023 0.021 0.015
13 Electronic Equipment 0.012 0.016 0.023 0.033 0.012 0.022 0.028 0.035
14 Motor Vehicles 0.077 0.100 0.134 0.161 0.075 0.053 0.054 0.175
15 Other Trans. Equipment 0.020 0.018 0.021 0.027 0.020 0.034 0.025 0.028
16 Misc. Manufacturing 0.018 0.016 0.015 0.015 0.018 0.036 0.033 0.016
17 Food and Tobacco 0.134 0.110 0.102 0.091 0.131 0.088 0.079 0.097
18 Textiles 0.041 0.035 0.026 0.022 0.040 0.034 0.028 0.023
19 Paper and Allied 0.058 0.059 0.058 0.045 0.057 0.029 0.027 0.048
20 Printing 0.027 0.029 0.027 0.026 0.026 0.036 0.031 0.028
Table 20 (cont’d)
Domar Weights in Canadian and U.S. Industries, 1982-2000

Industry 1982 1988 1995 2000 1982 1988 1995 2000
21 Chemicals 0.058 0.054 0.054 0.044 0.056 0.061 0.059 0.047
22 Petroleum Refining 0.096 0.036 0.032 0.029 0.093 0.034 0.026 0.032

23 Rubber and Plastics 0.019 0.020 0.022 0.023 0.018 0.023 0.024 0.024
24 Transportation 0.123 0.115 0.113 0.112 0.121 0.076 0.076 0.117
25 Communications 0.038 0.039 0.044 0.042 0.038 0.048 0.048 0.043
26 Electric Utilities 0.041 0.044 0.050 0.042 0.042 0.041 0.036 0.042
27 Gas Utilities 0.005 0.006 0.006 0.005 0.005 0.022 0.014 0.005
28 Wholesale Trade 0.087 0.099 0.107 0.114 0.086 0.106 0.107 0.119
29 Retail Trade 0.114 0.118 0.113 0.116 0.112 0.155 0.148 0.121
30 FIRE 0.177 0.204 0.229 0.235 0.176 0.229 0.241 0.244
31 Business Services 0.060 0.072 0.093 0.127 0.059 0.075 0.093 0.133
32 Health Services 0.031 0.037 0.044 0.043 0.030 0.180 0.213 0.045
33 Education, Private 0.002 0.002 0.002 0.004 0.002 0.015 0.016 0.004
34 Other Services 0.119 0.124 0.135 0.142 0.117 0.079 0.087 0.149
Industry Group
IT-producing Industries 0.056 0.062 0.078 0.082 0.088 0.088 0.092 0.105
IT-using Industries 0.559 0.607 0.651 0.706 0.706 0.735 0.740 0.772
Non-IT Industries 1.448 1.300 1.274 1.227 1.298 1.105 1.049 1.002
Total 2.062 1.968 2.003 2.014 2.092 1.929 1.882 1.879
145
Ho, Rao & Tang
Figure 12
Contributions to Aggregate MFP Growth by Industry in Canada and the

_____________________________________________________________________________
Wholesale Trade
Transportation
Agriculture
Communications
Wood and Furniture
Motor Vehicles
Non-energy Mining
Computers
Primary Metal
Chemicals
Electric Utilities
Retail Trade
Crude Petroleum
Coal Mining
Fabricated Metal
Non-metallic
Rubber and Plastics
Electronic Equip.
Construction
Electrical Equip.
Textiles
Misc. Manuf. Canada
Machinery United States
Education, Private
Gas Utilities
Paper and Allied
Printing
Other Trans. Equip.
Food and Tobacco
Health Services
Business Services
Petroleum Refining
Other Services
FIRE
–0.3 –0.2 –0.1 0.0 0.1 0.2 0.3
In Canada, the aggregate MFP growth in the latter half of the 1990s was mainly
due to IT-using and non-IT industries (76.6 percent), while in the United States
IT-producing industries contributed 0.6 percentage points of 0.8 percent growth.
The larger contributions from IT-using and non-IT industries in Canada were
due to their larger Domar weights, not to their higher growth rates.25 On the
other hand, the small Domar weight of 0.08 for IT-producing industries multi-
plied by their high MFP growth rates (2.9 percent per year on average) results in
a very small contribution.
146
Figure 13

_____________________________________________________________________________
FIRE
Agriculture
Primary Metal
Motor Vehicles
Crude Petroleum
Paper and Allied
Wholesale Trade
Electronic Equip.
Chemicals
Machinery
Food and Tobacco
Communications
Textiles
Computers
Other Trans. Equip.
Rubber and Plastics
Transportation
Petroleum Refining
Non-energy Mining
Coal Mining
Misc. Manuf. Canada
Fabricated Metal
Electrical Equip. United States
Gas Utilities
Education, Private
Retail Trade
Non-metallic
Health Services
Wood and Furniture
Electric Utilities
Printing
Other Services
Business Services
Construction
-0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2
For the United States, however, the larger contribution from IT-producing indus-
tries was due to the extraordinary MFP growth (5.9 percent per year on average).
The MFP growth was a mere 0.1 percent in both IT-using and non-IT industries.
147
Ho, Rao & Tang
Figure 14

_____________________________________________________________________________
FIRE
Retail Trade
Motor Vehicles
Other Services
Agriculture
Electronic Equip.
Wholesale Trade
Communications
Wood and Furniture
Computers
Primary Metal
Transportation
Electric Utilities
Business Services
Construction
Non-metallic
Fabricated Metal
Paper and Allied
Education, Private
Chemicals
Coal Mining
Misc. Manuf. Canada
Rubber and Plastics United States
Electrical Equip.
Petroleum Refining
Gas Utilities
Textiles
Other trans. Equip.
Non-energy Mining
Machinery
Printing
Food and Tobacco
Crude Petroleum
Health Services
–0.3 –0.2 –0.1 0.0 0.1 0.2 0.3 0.4
Turning to the detailed industry contributions in Figures 12 through 14, the big-
gest contributors to Canadian business MFP growth in the 1980s were: wholesale
trade; transportation; agriculture; communications; and wood and furniture. By
the latter half of the 1990s, they were FIRE, retail trade, motor vehicles, other
services and agriculture. On the other hand, the biggest contributors to the MFP
growth revival in the United States were: communication and electronic equip-
ment; computers; retail trade; agriculture; and electric utilities.
148
Conclusions
T HE MAIN OBJECTIVE OF THIS STUDY has been to provide an in-depth analysis of

the sources of output and labour productivity growth in Canadian and U.S.
industries, using newly developed comparable industry data for 34 industries in
Canada and the United States. The focus of this study has been on examining the
role of information and communication technologies and human capital in la-
bour productivity growth, especially in its acceleration during the latter half of
the 1990s.
Several important conclusions emerge from our empirical findings. Computers

and electronic equipment industries registered very strong growth in output,
labour productivity and MFP in both countries during the past 20 years. Growth
in MFP and intermediate input accounted for over three quarters of the growth
in output and labour productivity in these two industries in both countries.
The acceleration of growth in real value-added in the United States in the latter
half of the 1990s was largely due to the accumulation of IT capital and the in-
creased use of university-trained labour. On the other hand, in Canada, accumu-
lation of non-IT capital and the increased use of non-university labour were re-
sponsible for the resurgence of value-added growth in the business sector. The
growth in value added in the United States in the second half of the 1990s was
more concentrated in IT-producing industries while in Canada all the three ma-
jor industry groups contributed to the growth revival.
The IT capital was the driving force behind the revival of labour productivity
growth in the United States and its impact was widespread across many indus-
tries. On the other hand, IT capital made only a small contribution to the produc-
tivity growth resurgence in Canada. Close to 70 percent of labour productivity
growth in the United States in the second half of the 1990s was due to IT-
producing and IT-using industries. They accounted for only about 60 percent of
the business sector productivity growth in Canada. In addition, the contribution
of IT-producing industries in Canada was significantly smaller than in the
United States.
149
Ho, Rao & Tang
Endnotes
1 The share of hours worked by workers with at least a university degree in Canada
increased from 11 percent in 1990 to 16 percent in 2000. In the United States, it in-
creased from 24 to 27 percent.
2 See Harchaoui et al. (2002), Rao and Tang (2001), Crawford (2002), and Robidoux
and Wong (2003) for Canada, and Jorgenson, Ho, and Stiroh (2002) and Stiroh
(2002) for the United States.
3 In many previous studies involving Canada-U.S. comparisons, e.g. Gu and Ho

(2000) and Rao and Tang (2001), these industries are combined with one of the
three sectors: machinery, electrical equipment, and services.
4 For the purpose of policy analysis, in this study, we group communication services
with IT-producing industries, which is consistent with the OECD definition.
5 Harchaoui, Tarkhani, and Khanam (2004) and Gu and Wang (2004) in this volume
focus on the aggregate and detailed Canadian industries, respectively.
6 There have been a number of significant developments since those earlier studies.
First, software purchases are now treated as investments, as final demand rather
than as intermediate input in the previous system. The new treatment significantly
increases output and capital stock in terms of both levels and growth rates. Second,
the earlier work only covers the period 1961-95, before the dramatic growth resur-
gence in the second half of the 1990s that is captured here.
7 We define gross output as sales plus changes in the inventories, the output of all
firms in the industry. This is different from the sectoral output concept used by the
U.S. Bureau of Labor Statistics in their productivity estimates, where transactions
within an industry [the diagonal elements of the input/output (IO) matrix] are ex-
cluded. Statistics Canada produces estimates using gross output, value added and
the sectoral output concept.
8 As many have pointed out, this MFP growth term is a residual that captures a
variety of other factors, including economies of scale, unaccounted for inputs (such
as managerial talent and organizational structure), and measurement errors (in
both output and inputs).
9 If Equation (3) only used total labour instead of university and non-university,
then li = Li / Hi is simply the index of compositional change (or labour quality in-
dex in the Jorgenson terminology). That is, labour productivity change is MFP
BA
change plus input deepening plus labour quality change. Here, li and liNBA
represents the combination of changes in the composition of university hours,
150
composition of non-university hours, and the reallocation of hours between these

two types.
10 The quantity of intermediate input is calculated as a translog index of the three

components.
11 In the official estimates of Statistics Canada, gender is not used as a separate classi-
fication strata and therefore the estimates produced here will differ from those in
Gu et al. (2003). Gender has been used for this project for purposes of compatibility
to the Jorgenson database.
12 Here we consider only the private business sector for our 34 industries. Unlike
Jorgenson, Ho, and Stiroh (2002), we do not include the government and house-
hold sectors.
13 This is unlike Jorgenson, Gollop, and Fraumeni (1987) which defines aggregate V
as a simple linear sum of Vi's.
14 This differs from the treatment in Jorgenson, Ho, and Stiroh (2002) which con-
structs aggregate inputs ignoring the industry dimension. That approach generates
a reallocation term in the decomposition of aggregate MFP. Our treatment in Equa-
tion (9) is dictated by the fact that this project did not have detailed capital data by
asset types. Statistics Canada provided the Capital Input Series Kit already aggre-
gated over asset types.
15 The P-level has a total of 123 industries. The study presented in this chapter ex-
cludes owner-occupied dwellings (P116), though they are included in the chapter
by Harchaoui, Tarkhani, and Khanam in this volume. It should be noted that the
data use the final IO tables up until 1997 that are constructed on an Standard In-
dustrial Classification (SIC) basis and a set of tables for the period 1997 to 2000 that
were constructed just for this project on an SIC basis (the official tables for the lat-
ter period are produced only for the new NAICS) classification system.
16 In 2000, IT investment in Canada was CAN$34 billion in current prices, represent-

ing 37 percent of the overall machinery and equipment (M&E) investment, com-
pared to less than CAN$6 billion or 19 percent of the overall M&E investment in
1981. Similar changes occurred in the United States. In 2000, IT investment was
US$424 billion in current dollars, compared to US$62 billion in 1981. Its share of
the overall M&E investment increased to 39 percent in 2000 from 21 percent in
1981.
17 For instance, the fall in computer prices in European countries in the early 1990s
ranged from 10 to 47 percent (Triplett, 2001, p.4).
151
Ho, Rao & Tang
18 To implement the match model technique, a statistical agency chooses a sample of

products (models) of a type. It collects an initial period price for each of the products
selected. It then collects in the second period the price for the exact same products
that were selected in the initial period. The price index is computed by matching
the price for the second period with initial price, observation-by-observation or
”model-by-model” (for details, see Triplett). The hedonic regression technique re-
gresses the prices of a product on a list of product characteristics that affects prod-
uct quality. As an example, a list of characteristics for a computer includes speed,
often measured in MIPS, and memory size, often measured in megabytes, among
other technical features and specifications. The constant-quality price index is the
change in price in year over year after controlling for the characteristics. Unlike the
match model technique, the hedonic regression technique will use all observations
from all periods, including the ones that disappeared or were newly introduced.
The hedonic regression technique has become popular and gained wide acceptance
in statistics agencies worldwide in estimating price indexes for IT products. Never-
theless, it has been criticized for lack of theoretical foundation, especially for its
function forms, lack of transparency, and its subjectivities in selecting the quanti-
ties of characteristics.
19 These depreciation rates have been used to derive the official MFP estimates for the
business sector in Canada.
20 Note, however, that the educational classification is not entirely consistent over
time in both countries. The educational classification in the Labour Force Survey
changed in 1990 in Canada (Gu and Maynard, 2001). A similar change also took place
in the United States in the Current Population Survey in 1992 and in the Census of
Population in 1990 (Jorgenson, Ho, and Stiroh, 2002).
21 To remind the reader, the tables should be read in the following manner. The gross
output column shows the growth rates, the five columns of input contributions in-
dicate the growth rates multiplied by the share weights, and the MFP column pro-
vides growth rates.
22 Output for a group is aggregated over industry outputs of the group using a trans-
log index. Inputs are aggregated in the same fashion.
23 The bottom-up approach refers to aggregating from the industry level. This is in
contrast with the top-down approach that refers to aggregation directly over com-
modity level with no industry dimension. Statistics Canada produces estimates us-
ing both approaches.
24 The aggregate MFP estimate of 1.1 in the second half of the 1990s for Canada was
the same as the official estimate (Table 383-0001 in CANSIM). The estimate of 0.8 for
the United States is similar to the estimate of private sector in Jorgenson, Ho, and
Stiroh (2002) although that has a larger coverage. It is lower than the official estimate
152
of 1.3 from the U.S. Bureau of Labor Statistics (BLS News Release, April 8, 2003).
The BLS measure of output and capital and labour inputs is different from ours
(for the BLS method, see http://www.bls.gov/news.release/prod3.tn.htm). How-
ever, as noted in the section entitled Data and Measurement Issues, the relative MFP
growth rates in the two countries should not be used as scoreboards, given several
differences in the way changes in capital services are measured in the two coun-
tries. The measures here however are useful for examining whether changes in
trends are common to the two countries.
25 It is interesting to note that IT-producing and IT-using industries maintain on

average larger Domar weights in the United States than in Canada, which indicates
that these industries in the United States are more intermediate input intensive
than in Canada. However, in Canada, non-IT industries are generally more inten-
sive in intermediate input than in the United States.
Acknowledgments
WE WISH TO THANK DALE W. JORGENSON for his valuable guidance throughout the
project. We are grateful to Renée St-Jacques for her support and encourage-
ment, and to Michael Denny, Erwin Diewert, Pierre Duguay, Tarek Harchaoui,
Alice Nakamura, and Andrew Sharpe for their useful comments and sugges-
tions. We appreciate Joanne Fleming’s help with editing the draft paper. We
thank John Baldwin and his team members, at Statistics Canada, for providing
office facilities and giving access to data for this project. Wulong Gu provided the
labour data for Canada. The U.S. accounts were constructed with Kevin Stiroh and
Jon Samuels. The views expressed are those of the authors and do not necessar-
ily reflect those of Industry Canada.
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Appendix A
Measuring Capital Input and Labour Input
T HE CONSTRUCTION OF CAPITAL INPUT AND LABOUR INPUT is more complicated

than that for gross output and intermediate inputs. Some explanation is nec-
essary to better understand the results emerging from the present study. We first
discuss capital input.
Capital Input
Using investment data, capital stock for type j asset in industry i is constructed
by the use of the perpetual inventory method,
(A1) Zi , j ,t − Zi , j ,t − 1 = I i , j ,t − δ j Zi , j ,t − 1
where Zi ,j ,t and Ii ,j ,t are capital stock and new investment of asset type j in in-
dustry i in year t. δj is the depreciation rate of asset type j, reflecting the rate of
decline in the efficiency of the capital stock. It is assumed that the depreciation
rate of an asset is constant over time and identical for all industries.
Capital stocks of different assets are then aggregated into capital input, which
accounts for difference in quality or marginal productivity of those assets. To
study the relative importance of IT capital and non-IT capital, this paper divides
assets into two groups. The IT group includes computer hardware, software, and
communication equipment, while the non-IT group includes other machinery
and equipment, structures, inventories, and land.
To quantify the impact of substitution among different types of capital input

under the current framework, capital input or service for each asset type is as-
sumed to be proportional to the capital stock, that is, capital service for each asset
is the same at all points of time. Under this assumption, the quantity index of IT
capital input is defined as a translog aggregate of the different types of IT capital
stocks
(A2) ∆ ln K iIT = ∑v
m∈IT
IT , i , m ∆ ln Zi , m .
157
Ho, Rao & Tang
where vIT , i ,m is the two-period average capital income share of type m IT asset in
total IT capital income, and ∑v
m∈IT
IT , i , m =1.
Similarly, the quantity index of non-IT capital input is defined as a translog ag-
gregate of the different types of non-IT capital stocks
(A3) ∆ ln K iNIT = ∑
m∈NIT
vNIT , i , m ∆ ln Zi , m .
where vNIT , i , m is the two-period average capital income share of type m non-IT
asset in total non-IT capital income, and ∑
m∈NIT
vNIT , i , m = 1 .
The capital income for each asset is estimated by multiplying its rental price by
its capital stock. The rental prices are estimated based on the widely used capital
user cost formula, originally developed by Christensen and Jorgenson (1969),
and recently used by Jorgenson and Stiroh (2000) and Jorgenson and Yun (2001).
The user cost for a specific asset in each industry accounts for investment tax
credits, capital consumption allowances, the statutory tax rate, property taxes,
debt/equity financing, and personal taxes. It is estimated by assuming that the
ex-post actual rate of return on each asset is equal across all assets in each indus-
try. For details of the tax parameters and estimation, see Jorgenson and Yun, and
Jorgenson, Ho and Stiroh (2002) for the United States, and Harchaoui and Tarkhani
(2003) for Canada.
Labour Input
The methodology for estimating labour inputs used in the present study was
introduced by Jorgenson and Griliches (1995), and has been widely used in the
study of sources of economic or productivity growth.
To capture the impact of labour with different education on labour productivity

growth in the present study, the total labour input is divided into university
labour and non-university labour inputs. To quantify the impact of substitution
among different types of labour input under the current framework, labour input
or service for each type is assumed to be proportional to the hours worked, that
is, labour service for each type is the same at all points of time. Under this as-
sumption, labour inputs are estimated on the basis of hours worked and labour
158
compensation for each type of worker. The quantity index of university labour
input is defined as a translog aggregate of the different types of hours worked
(A4) ∆ ln LBA
i = ∑v
m∈BA
BA , i , m ∆ ln H i , m .
where vBA ,i ,m is the two-period average labour compensation share of type m

hours worked with university degree in total labour compensation for all hours
worked by workers with university education, and ∑ vBA ,i ,m = 1 .
m∈BA
Similarly, the quantity index of non-university labour input is defined as a trans-

log aggregate of the different types of non-university hours worked
(A5) ∆ ln LNBA
i = ∑
m∈NBA
vNBA , i ,m ∆ ln H i , m .
where vNBA ,i ,m is the two-period average labour compensation share of type m

non-university hours worked in total labour compensation for all hours worked
by workers without university education, and ∑ vNBA , i ,m = 1 .
m∈NBA
159
Ho, Rao & Tang
Appendix B
Current Practices in Estimating IT Price Indexes in
Canada and the United States
M ANY PEOPLE HAVE QUESTIONED PRODUCTIVITY NUMBERS related to informa-

tion technologies. In particular, their perception is that U.S. IT data incor-
porates more drastic decline in IT prices than the corresponding Canadian data.
Consequently, Canada will show relatively lower output and productivity
growth in IT-producing industries and higher output and productivity growth in
IT-using services. Therefore, it is important to document the methodology used
in Canada and the United States. In this appendix, we describe the methodolo-
gies used by statistical agencies in Canada and the United States in estimating
the prices for computers, telecommunication equipment, and software. We show
that the methods used by Canada and the United States for developing the IT
price indexes are fairly similar.
The database developed by Jorgenson and his research team for productivity
analysis is mainly based on data from the U.S. Bureau of Economic Analysis
(BEA). Thus, our discussion for the United States will be centered on the meth-
odologies used by the BEA. Table B1 summarizes techniques used in estimating
the prices of IT products in the two countries.
Table B1
Methods of Estimating IT Price Indexes in Canada and the United States
IT Products Countries Methods

Computers United States Mixed hedonic regression and match model;
Fisher chained
Canada Mixed hedonic regression and match model;
Fisher chained
Communication United States Mixed hedonic regression and match model;
Equipment Fisher chained
Canada Match model technique;
Fisher chained
Software United States Mixed hedonic regression and match model;
Fisher chained
Canada BEA methodology;
Fisher chained
160
Computers
United States
Computers and peripheral equipment include mainframes, PC’s, storage devices,

displays, and peripheral equipment, and others. BEA’s computer price indexes
reflect four types of detailed quality adjusted computer price indexes: 1) the BEA
composite price index, 2) the BEA chained match-model price index, 3) the BEA
regression price index, and 4) the BLS price index (BEA, 2001a).
− The BEA composite price indexes are used for most components of the
computers and peripheral equipment price index for the period 1972-92.
The composite index uses both observed prices and prices imputed from
a regression equation to construct a price index. The composite price in-
dex combines the strengths of the match-model and hedonic methods.
The regression equation or hedonic function, is used to estimate prices of
characteristics (speed, memory, etc.).
− The BEA chained match-model price indexes are used for constructing
the price indexes for PC’s in select time periods, beginning with 1982.
− The BEA regression price index is used for estimating the price index for
tape drives for the period of 1972-83. The regression index is formed
from the coefficients for the year dummies in a hedonic function that re-
lates prices paid for tape drives to quality characteristics such as speed
and memory size.
− BLS price indexes, including producer price indexes (PPI), international

price indexes (IPI), and consumer price indexes (CPI) are generally re-
flected in the NIPA computers and peripheral equipment price indexes
as they become available. For components of the NIPA computers and
peripheral equipment price index that are estimated from multiple PPI’s,
the Fisher chain-type formula is used to combine the more detailed PPI’s.
Other components are estimated directly from the BLS PPI or IPI.
161
Ho, Rao & Tang
Canada1
− The Canadian price index incorporates some prices from the U.S. series,
as well as some from Canada. From 1981 onward, Canada has used a
weighted average of the BEA series for computers, direct access storage
drives, printers, and displays, using weights based on Canadian produc-
tion levels.
− The BEA tape drive index was not used because the output of this prod-
uct is small in Canada.
− The BEA series were incorporated into the Canadian price index through
1992, at which point, price indexes for microcomputers and printers
were based on prices collected in Canada and adjusted with a hedonic
procedure. The BEA series were adjusted for exchange rate variations in
order to express the indexes in terms of Canadian prices.
Telecommunication Equipment
United States
Telecommunication equipment includes LAN equipment such as routers,

switches, LAN cards, hubs, and others.
The BEA price index for telecommunication equipment is based on the estimate
from the Federal Reserve Board (FRB) (BEA, 2001b). The FRB estimate is based
on a mixed hedonic regression and match model techniques (Doms and Forman,
2001). Hedonic regressions were used to estimate price changes for the two larg-
est classes of LAN equipment, routers and switches. A match model was used
for LAN cards and the prices for hubs were inferred by using an economic rela-
tionship to switches.
1 For details, see Eldridge and Sherwood (2001).
162
Canada
Telephone Switching Equipment
Canada produces a price series for telephone switching equipment based upon
purchased prices collected from Canadian telephone companies. The match
model is used.
Semiconductors
Canada does not collect prices for semiconductors, but rather uses BLS price in-
dexes for several products within the semiconductor industry to proxy deflators
for integrated circuits and semiconductors and parts. The BLS producer price
indexes for semiconductors are constructed using a match model technique. The
producer price indexes are adjusted by Statistics Canada for exchange rate varia-
tions.
Software
Software is further disaggregated into three asset types: pre-packed, custom-

design and owner-account. The price indexes are different for different software.
United States
The BEA price index for pre-packaged software has several parts: the BEA price
index for computers and peripherals in private fixed investment (1981-84); an
average of the BEA hedonic price index and a match-model price index for
spreadsheets and word-processors (1985-93); the BEA match-model price index
(bias-corrected) for selected pre-packaged software (1994-97); and the U.S. Bureau
of Labor Statistics (BLS) producer price index (bias corrected) for pre-packaged
application software (1988 onwards).
Canada
The Canadian price index for pre-packaged software is an adjusted BEA price
index (Jackson, 2001). The adjusted BEA price index is an average of the BEA
price index, weighted by the domestic share of supply to the domestic market,
and an exchange-rate adjusted BEA price index, weighted by the import share of
supply to the domestic market. For the exchange-rate adjusted BEA price index,
163
Ho, Rao & Tang
it is assumed that exchange rate fluctuations are fully passed through to the do-
mestic price of imported software.
The BEA price index for own-account software is a reflection of increase in the
median price of a business employee in the U.S. economy, including the cost of
salary, and all additional compensations and overhead (McKinsey Global Insti-
tute, 2001).2
The Canadian price index for own-account software is also estimated based on
the wage bill for computer programmers and system analysts. It is a fixed-
weighted average of an index of the average hourly earnings for programmers
and system analysts and an index of the costs of non-labour inputs to the com-
puter services industry. The weights are fixed to about two-thirds and one-third,
respectively.
For both the BEA and Canada, the price index for custom-design software is
derived as a weighted average of the changes in the price indexes for pre-
packaged software and own-account software. The weights are fixed to one quar-
ter and three quarters, respectively.
IT Price Indexes in Canada and the United States
In this section, we present the price indexes of IT products used by Statistics

Canada and the BEA. It should be noted that the price difference between the
two countries reflects not only the difference in methods but also the difference
in the product mix.
Table B2 shows annual changes in the prices of computers, telecommunication

equipment, and software in Canada and the United States. These prices are im-
plicit price deflators for business investment in these IT equipment and software.
2 Implicitly, it assumes that there is no productivity gain for persons who engage in the
software development.
164
Table B2
Average Annual Change in IT Prices in Canada and the United States

(Percent)
Communication
Computers Equipment Software
Canada United States Canada United States Canada United States
1981-88 –17.70 –13.38 3.91 2.67 –1.23 0.88
1988-95 –14.58 –12.15 –2.45 –0.39 –4.58 –1.54
1995-2000 –18.29 –25.23 –1.39 –2.96 –1.12 –0.86
1981-2000 –16.71 –16.04 0.17 0.06 –2.44 –0.47
For the 1981-2000 period, the prices of computers and telecommunication

equipment show similar changes in Canada and the United States while the price
of software shows faster decline in Canada than in the United States. For both
countries, the prices of computers declined at about 16 percent per year over the
1981-2000 period and the price of telecommunication equipment was virtually
unchanged. For software, the price declined at an annual rate of 2.4 percent in
Canada, compared to 0.5 percent in the United States. However, the price decline
for computers in Canada was slower than in the United States in the second half
of the 1990s. The difference was partly due to the depreciation of the Canadian
dollar relative to the U.S. dollar.
165
Industry Canada Research Publications
INDUSTRY CANADA WORKING PAPER SERIES
No. 1 Economic Integration in North America: Trends in Foreign Direct Investment

and the Top 1,000 Firms, Micro-Economic Policy Analysis staff including
John Knubley, Marc Legault, and P. Someshwar Rao, Industry Canada, 1994.
No. 2 Canadian-Based Multinationals: An Analysis of Activities and Performance,

Micro-Economic Policy Analysis staff including P. Someshwar Rao, Marc Legault,
and Ashfaq Ahmad, Industry Canada, 1994.
No. 3 International R&D Spillovers Between Industries in Canada and the

United States, Jeffrey I. Bernstein, Carleton University and National Bureau of
Economic Research, under contract with Industry Canada, 1994.
No. 4 The Economic Impact of Mergers and Acquisitions on Corporations,

Gilles Mcdougall, Micro-Economic Policy Analysis, Industry Canada, 1995.
No. 5 Steppin’ Out: An Analysis of Recent Graduates Into the Labour Market,
Ross Finnie, School of Public Administration, Carleton University, and Statistics
Canada, under contract with Industry Canada, 1995.
No. 6 Measuring the Compliance Cost of Tax Expenditures: The Case of Research
and Development Incentives, Sally Gunz and Alan Macnaughton, University of
Waterloo, and Karen Wensley, Ernst & Young, Toronto, under contract with
Industry Canada, 1996.
No. 7 Governance Structure, Corporate Decision-Making and Firm Performance in

North America, P. Someshwar Rao and Clifton R. Lee-Sing, Micro-Economic
Policy Analysis, Industry Canada, 1996.
No. 8 Foreign Direct Investment and APEC Economic Integration, Ashfaq Ahmad,
P. Someshwar Rao, and Colleen Barnes, Micro-Economic Policy Analysis, Industry
Canada, 1996.
No. 9 World Mandate Strategies for Canadian Subsidiaries, Julian Birkinshaw,

Institute of International Business, Stockholm School of Economics,
under contract with Industry Canada, 1996.
167
No. 10 R&D Productivity Growth in Canadian Communications Equipment and

Manufacturing, Jeffrey I. Bernstein, Carleton University and National Bureau of
Economic Research, under contract with Industry Canada, 1996.
No. 11 Long-Run Perspective on Canadian Regional Convergence, Serge Coulombe,

Department of Economics, University of Ottawa, and Frank C. Lee,
No. 12 Implications of Technology and Imports on Employment and Wages

in Canada, Frank C. Lee, Micro-Economic Policy Analysis, Industry Canada,
1996.
No. 13 The Development of Strategic Alliances in Canadian Industries:

A Micro Analysis, Sunder Magun, Applied International Economics,
No. 14 Employment Performance in the Knowledge-Based Economy, Surendra Gera,

Industry Canada, and Philippe Massé, Human Resources Development
Canada, 1996.
No. 15 The Knowledge-Based Economy: Shifts in Industrial Output, Surendra Gera,

Industry Canada, and Kurt Mang, Department of Finance, 1997.
No. 16 Business Strategies of SMEs and Large Firms in Canada, Gilles Mcdougall and
David Swimmer, Micro-Economic Policy Analysis, Industry Canada, 1997.
No. 17 Impact of China’s Trade and Foreign Investment Reforms on the World
Economy, Winnie Lam, Micro-Economic Policy Analysis, Industry Canada, 1997.
No. 18 Regional Disparities in Canada: Characterization, Trends and Lessons for

Economic Policy, Serge Coulombe, Department of Economics, University of
Ottawa, under contract with Industry Canada, 1997.
No. 19 Inter-Industry and U.S. R&D Spillovers, Canadian Industrial Production and
Productivity Growth, Jeffrey I. Bernstein, Carleton University and National Bureau
of Economic Research, under contract with Industry Canada, 1998.
No. 20 Information Technology and Labour Productivity Growth: An Empirical

Analysis for Canada and the United States, Surendra Gera, Wulong Gu, and
Frank C. Lee, Micro-Economic Policy Analysis, Industry Canada, 1998.
No. 21 Capital-Embodied Technical Change and the Productivity Growth Slowdown

in Canada, Surendra Gera, Wulong Gu, and Frank C. Lee, Micro-Economic
168
No. 23 Restructuring in Canadian Industries: A Micro Analysis, Sunder Magun,

Applied International Economics, under contract with Industry Canada, 1998.
No. 24 Canadian Government Policies Toward Inward Foreign Direct Investment,

Steven Globerman, Simon Fraser University and Western Washington
University, and Daniel Shapiro, Simon Fraser University, under contract with
No. 25 A Structuralist Assessment of Technology Policies – Taking Schumpeter

Seriously on Policy, Richard G. Lipsey and Kenneth Carlaw, Simon Fraser
University, with a contribution by Davit D. Akman, research associate, under
contract with Industry Canada, 1998.
No. 26 Intrafirm Trade of Canadian-Based Foreign Transnational Companies,

Richard A. Cameron, Micro-Economic Policy Analysis, Industry Canada, 1998.
No. 27 Recent Jumps in Patenting Activities: Comparative Innovative Performance of

Major Industrial Countries, Patterns and Explanations, Mohammed
Rafiquzzaman and Lori Whewell, Micro-Economic Policy Analysis, Industry
Canada, 1998.
No. 28 Technology and the Demand for Skills: An Industry-Level Analysis,

Surendra Gera and Wulong Gu, Industry Canada, and Zhengxi Lin,
Statistics Canada, 1999.
No. 29 The Productivity Gap Between Canadian and U.S. Firms, Frank C. Lee and
Jianmin Tang, Micro-Economic Policy Analysis, Industry Canada, 1999.
No. 30 Foreign Direct Investment and Productivity Growth: The Canadian Host-
Country Experience, Surendra Gera, Wulong Gu and Frank C. Lee, Micro-
Economic Policy Analysis, Industry Canada, 1999.
No. 31 Are Canadian-Controlled Manufacturing Firms Less Productive than their

Foreign-Controlled Counterparts? Someshwar Rao and Jianmin Tang, Micro-
No. 32 The Canada-U.S. Productivity Growth Paradox, Serge Coulombe, Department

of Economics, University of Ottawa, under contract with Industry Canada, 2000.
No. 33 R&D Propensity and Productivity Performance of Foreign-Controlled Firms in

Canada, Jianmin Tang and Someshwar Rao, Micro-Economic Policy Analysis,
No. 34 Sectoral Impacts of Kyoto Compliance, Randall Wigle, Wilfrid Laurier

University, under contract with Industry Canada, 2001.
169
No. 35 Economic Impact of Carbon Abatement Policies and Market Structure:

A Dynamic General Equilibrium Analysis with Imperfect Competition,
Yazid Dissou, Carolyn Mac Leod and Mokhtar Souissi, Micro-Economic Policy
Analysis, Industry Canada, 2002.
No. 36 Foreign Direct Investment and Domestic Capital Formation, Walid Hejazi and
Peter Pauly, University of Toronto, under contract with Industry Canada, 2002.
No. 37 National Political Infrastructure and Foreign Direct Investment, Steven

Globerman, Western Washington University, and Daniel Shapiro, Simon Fraser
No. 38 The Link Between Innovation and Productivity in Canadian Manufacturing

Industries, Wulong Gu, Statistics Canada, and Jianmin Tang, Industry Canada,
2003.
No. 39 Competition Perceptions and Innovation Activities: An Empirical Study of

Canadian Manufacturing Firms, Jianmin Tang, Micro-Economic Policy Analysis,
No. 40 International Trade, Interprovincial Trade, and Canadian Provincial Growth,

Serge Coulombe, Department of Economics, University of Ottawa, under
INDUSTRY CANADA DISCUSSION PAPER SERIES
No. 1 Multinationals as Agents of Change: Setting a New Canadian Policy

on Foreign Direct Investment, Lorraine Eden, Carleton University,
No. 2 Technological Change and International Economic Institutions, Sylvia Ostry,

Centre for International Studies, University of Toronto, under contract with
No. 3 Canadian Corporate Governance: Policy Options, Ronald. J. Daniels, Faculty of

Law, University of Toronto, and Randall Morck, Faculty of Business, University
of Alberta, under contract with Industry Canada, 1996.
No. 4 Foreign Direct Investment and Market Framework Policies: Reducing Frictions
in APEC Policies on Competition and Intellectual Property, Ronald Hirshhorn,
No. 5 Industry Canada’s Foreign Investment Research: Messages and Policy

Implications, Ronald Hirshhorn, under contract with Industry Canada, 1997.
170
No. 6 International Market Contestability and the New Issues at the World Trade
Organization, Edward M. Graham, Institute for International Economics,
Washington (D.C.), under contract with Industry Canada, 1998.
No. 7 Implications of Foreign Ownership Restrictions for the Canadian Economy –

A Sectoral Analysis, Steven Globerman, Western Washington University, under
No. 8 Determinants of Canadian Productivity Growth: Issues and Prospects,

Richard G. Harris, Simon Fraser University and Canadian Institute for Advanced
Research, under contract with Industry Canada, 1999.
No. 9 Is Canada Missing the “Technology Boat”? Evidence from Patent Data,
Manuel Trajtenberg, Tel Aviv University, National Bureau of Economic Research
and Canadian Institute for Advanced Research, under contract with Industry
Canada, 2000.
No. 10 North American Economic Integration: Issues and Research Agenda, Richard
G. Harris, Simon Fraser University, under contract with Industry Canada, 2001.
No. 11 Social Policy and Productivity Growth: What are the Linkages? Richard G.
Harris, Simon Fraser University, under contract with Industry Canada, 2002.
No. 12 The Irish Economic Boom: Facts, Causes, and Lessons, Pierre Fortin, Université
du Québec à Montréal and Canadian Institute for Advanced Research, under
No. 13 Services in the New Economy: Research Issues, Brian R. Copeland, University
of British Columbia, under contract with Industry Canada, 2003.
No. 14 Making Canada the Destination of Choice for Internationally Mobile Resources,
Keith Head and John Ries, Uiversity of British Columbia, under contract with
INDUSTRY CANADA OCCASIONAL PAPER SERIES
No. 1 Formal and Informal Investment Barriers in the G-7 Countries: The Country
Chapters, Micro-Economic Policy Analysis staff including Ashfaq Ahmad,
Colleen Barnes, John Knubley, Rosemary D. MacDonald, and
Christopher Wilkie, Industry Canada, 1994.
Formal and Informal Investment Barriers in the G-7 Countries: Summary and
Conclusions, Micro-Economic Policy Analysis staff including Ashfaq Ahmad,
Colleen Barnes, and John Knubley, Industry Canada, 1994.
171
No. 2 Business Development Initiatives of Multinational Subsidiaries in Canada,

Julian Birkinshaw, University of Western Ontario, under contract with Industry
Canada, 1995.
No. 3 The Role of R&D Consortia in Technology Development, Vinod Kumar,

Research Centre for Technology Management, Carleton University, and Sunder
Magun, Centre for Trade Policy and Law, University of Ottawa and Carleton
No. 4 Gender Tracking in University Programs, Sid Gilbert, University of Guelph,

and Alan Pomfret, King’s College, University of Western Ontario, under contract
with Industry Canada, 1995.
No. 5 Competitiveness: Concepts and Measures, Donald G. McFetridge, Department

of Economics, Carleton University, under contract with Industry Canada, 1995.
No. 6 Institutional Aspects of R&D Tax Incentives: The SR&ED Tax Credit, G. Bruce
Doern, School of Public Administration, Carleton University, under contract with
No. 7 Competition Policy as a Dimension of Economic Policy: A Comparative

Perspective, Robert D. Anderson and S. Dev Khosla, Economics and
International Affairs Branch, Bureau of Competition Policy, Industry Canada,
1995.
No. 8 Mechanisms and Practices for the Assessment of the Social and Cultural
Implications of Science and Technology, Liora Salter, Osgoode Hall Law
School, University of Toronto, under contract with Industry Canada, 1995.
No. 9 Science and Technology: Perspectives for Public Policy, Donald G. McFetridge,
Department of Economics, Carleton University, under contract with Industry
Canada, 1995.
No. 10 Endogenous Innovation and Growth: Implications for Canada, Pierre Fortin,
Université du Québec à Montréal and Canadian Institute for Advanced Research,
and Elhanan Helpman, Tel Aviv University and Canadian Institute for Advanced
Research, under contract with Industry Canada, 1995.
No. 11 The University-Industry Relationship in Science and Technology,

Jérôme Doutriaux, University of Ottawa, and Margaret Barker, Meg Barker
Consulting, under contract with Industry Canada, 1995.
No. 12 Technology and the Economy: A Review of Some Critical Relationships,

Michael Gibbons, University of Sussex, under contract with Industry Canada,
1995.
172
No. 13 Management Skills Development in Canada, Keith Newton, Micro-Economic

No. 14 The Human Factor in Firm’s Performance: Management Strategies for

Productivity and Competitiveness in the Knowledge-Based Economy,
Keith Newton, Micro-Economic Policy Analysis, Industry Canada, 1996.
No. 15 Payroll Taxation and Employment: A Literature Survey, Joni Baran, Micro-
No. 16 Sustainable Development: Concepts, Measures, Market and Policy Failures at the
Open Economy, Industry and Firm Levels, Philippe Crabbé, Institute for Research
on the Environment and Economy, University of Ottawa, under contract with
No. 17 Measuring Sustainable Development: A Review of Current Practice,

Peter Hardi and Stephan Barg, with Tony Hodge and Laszlo Pinter, International
Institute for Sustainable Development, under contract with Industry Canada,
1997.
No. 18 Reducing Regulatory Barriers to Trade: Lessons for Canada from the European
Experience, Ramesh Chaitoo and Michael Hart, Centre for Trade Policy and Law,
Carleton University, under contract with Industry Canada, 1997.
No. 19 Analysis of International Trade Dispute Settlement Mechanisms and

Implications for Canada’s Agreement on Internal Trade, E. Wayne
Clendenning and Robert J. Clendenning, E. Wayne Clendenning & Associates
Inc., under contract with Industry Canada, 1997.
No. 20 Aboriginal Businesses: Characteristics and Strategies for Growth,

David Caldwell and Pamela Hunt, Management Consulting Centre, under
contract with Aboriginal Business Canada, Industry Canada, 1998.
No. 21 University Research and the Commercialization of Intellectual Property in

Canada, Wulong Gu and Lori Whewell, Micro-Economic Policy Analysis,
No. 22 A Regional Perspective on the Canada-U.S. Standard of Living Comparison,

Raynald Létourneau and Martine Lajoie, Micro-Economic Policy Analysis,
No. 23 Linkages Between Technological Change and Productivity Growth,

Steven Globerman, Western Washington University, under contract with
173
No. 24 Investment and Productivity Growth – A Survey From the Neoclassical and
New Growth Perspectives, Kevin J. Stiroh, Federal Reserve Bank of New York,
No. 25 The Economic Determinants of Innovation, Randall Morck, University of

Alberta, and Bernard Yeung, New York University, under contract with Industry
Canada, 2000.
No. 26 SMEs, Exports and Job Creation: A Firm-Level Analysis, Élisabeth Lefebvre and
Louis A. Lefebvre, CIRANO and École Polytechnique de Montréal, under contract
No. 27 The Location of Higher Value-Added Activities, Steven Globerman, Western

Washington University, under contract with Industry Canada, 2001.
CANADA IN THE 21ST CENTURY SERIES
No. 1 Global Trends: 1980-2015 and Beyond, J. Bradford DeLong, University

of California, Berkeley, under contract with Industry Canada, 1998.
No. 2 Broad Liberalization Based on Fundamentals: A Framework for Canadian

Commercial Policy, Randall Wigle, Wilfrid Laurier University, under contract
No. 3 North American Economic Integration: 25 Years Backward and Forward,

Gary C. Hufbauer and Jeffrey J. Schott, Institute for International Economics,
Washington (D.C.), under contract with Industry Canada, 1998.
No. 4 Demographic Trends in Canada, 1996-2006: Implications for the Public and
Private Sectors, David K. Foot, Richard A. Loreto, and Thomas W. McCormack,
Madison Avenue Demographics Group, under contract with Industry Canada,
1998.
No. 5 Capital Investment Challenges in Canada, Ronald P.M. Giammarino,

University of British Columbia, under contract with Industry Canada, 1998.
No. 6 Looking to the 21st Century – Infrastructure Investments for Economic Growth
and for the Welfare and Well-Being of Canadians, Christian DeBresson,
Université du Québec à Montréal, and Stéphanie Barker, Université de Montréal,
No. 7 The Implications of Technological Change for Human Resource Policy,

Julian R. Betts, University of California, San Diego, under contract with Industry
Canada, 1998.
174
No. 8 Economics and the Environment: The Recent Canadian Experience and
Prospects for the Future, Brian R. Copeland, University of British Columbia,
No. 9 Individual Responses to Changes in the Canadian Labour Market,

Paul Beaudry and David A. Green, University of British Columbia, under
No. 10 The Corporate Response – Innovation in the Information Age, Randall Morck,
University of Alberta, and Bernard Yeung, University of Michigan, under
No. 11 Institutions and Growth: Framework Policy as a Tool of Competitive

Advantage for Canada, Ronald J. Daniels, University of Toronto, under contract
PERSPECTIVES ON NORTH AMERICAN FREE TRADE SERIES
No. 1 Can Small-Country Manufacturing Survive Trade Liberalization? Evidence

from the Canada-U.S. Free Trade Agreement, Keith Head and John Ries,
University of British Columbia, under contract with Industry Canada, 1999.
No. 2 Modelling Links Between Canadian Trade and Foreign Direct Investment,
Walid Hejazi and A. Edward Safarian, University of Toronto, under contract
No. 3 Trade Liberalisation and the Migration of Skilled Workers, Steven Globerman,
Western Washington University and Simon Fraser University, under contract
No. 4 The Changing Industry and Skill Mix of Canada’s International Trade, Peter
Dungan and Steve Murphy, Institute for Policy Analysis, University of Toronto,
No. 5 Effects of the Canada-United States Free Trade Agreement on Interprovincial

Trade, John F. Helliwell, University of British Columbia, Frank C. Lee, Industry
Canada, and Hans Messinger, Statistics Canada, 1999.
No. 6 The Long and Short of the Canada-U.S. Free Trade Agreement, Daniel Trefler,
University of Toronto, under contract with Industry Canada, 1999.
175
MONOGRAPH
Industry-Level Productivity and International Competitiveness Between

Canada and the United States, edited by Dale W. Jorgenson, Harvard
University, and Frank C. Lee, Industry Canada, 2001.
Economic Growth in Canada and the United States in the Information Age,
edited by Dale W. Jorgenson, Harvard University, 2004.
RESEARCH VOLUME SERIES
No. 1 Foreign Investment, Technology and Economic Growth, Donald G. McFetridge

ed., University of Calgary Press, 1991.
No. 2 Corporate Globalization Through Mergers and Acquisitions, L. Waverman ed.,

University of Calgary Press, 1991.
No. 3 Multinationals in North America, Lorraine Eden ed., University of Calgary

Press, 1994.
No. 4 Canadian-Based Multinationals, Steven Globerman ed., University of Calgary

Press, 1994.
No. 5 Corporate Decision-Making in Canada, Ronald J. Daniels and Randall Morck

eds., University of Calgary Press, 1995.
No. 6 Implications of Knowledge-Based Growth for Micro-Economic Policies, Peter

Howitt ed., University of Calgary Press, 1996.
No. 7 The Asia Pacific Region in the Global Economy: A Canadian Perspective,
Richard G. Harris ed., University of Calgary Press, 1996.
No. 8 Financing Growth in Canada, Paul J.N. Halpern ed., University of Calgary
Press, 1997.
No. 9 Competition Policy and Intellectual Property Rights in the Knowledge-Based

Economy, Robert D. Anderson and Nancy T. Gallini eds., University of Calgary
Press, 1998.
No. 10 Productivity Issues in Canada, Someshwar Rao and Andrew Sharpe eds.,
University of Calgary Press, 2002.
No. 11 North American Linkages: Opportunities and Challenges for Canada, Richard
G. Harris ed., University of Calgary Press, 2003.
176
JOINT PUBLICATIONS
Capital Budgeting in the Public Sector, in collaboration with the John Deutsch
Institute, Jack Mintz and Ross S. Preston eds., 1994.
Infrastructure and Competitiveness, in collaboration with the John Deutsch

Institute, Jack Mintz and Ross S. Preston eds., 1994.
Getting the Green Light: Environmental Regulation and Investment in Canada,

in collaboration with the C.D. Howe Institute, Jamie Benidickson, G. Bruce Doern,
and Nancy Olewiler, 1994.
To obtain copies of documents published under Industry Canada’s Research Publications

Program, please contact:
Publications Officer
Micro-Economic Policy Analysis
Industry Canada
10th Floor, East Tower
235 Queen Street
Ottawa, Ontario, K1A 0H5
Tel.: (613) 952-5704; Fax: (613) 991-1261; E-mail: mepa.apme@ic.gc.ca
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Economic Growth in Canada and the

United States in the Information Age

Economic Growth in Canada and the

Industry Canada Research Monograph

“Industry Canada Research Monograph”

HC79.I52E32 2004 338.4’56’0971 C2004-980077-9

2. INFORMATION TECHNOLOGY AND ECONOMIC GROWTH IN THE

4. SOURCES OF OUTPUT GROWTH IN CANADIAN AND

INDUSTRY CANADA RESEARCH PUBLICATIONS 167

T HE THREE STUDIES PUBLISHED IN THIS MONOGRAPH have employed different

The monograph is the result of the collaborative effort of Industry Canada,

Economic Growth in Canada and the 1

T HE U.S. ECONOMY HAS UNDERGONE A REMARKABLE RESURGENCE since the mid-

In Chapter 2, Harchaoui, Tarkhani, and Khanam provide a detailed comparison

Harchaoui, Tarkhani, and Khanam present a detailed comparison of data for

In Chapter 3, Gu and Wang analyze the sources of economic growth for

In order to isolate the differences in the behaviour of individual industries in Canada

Tarek M. Harchaoui, Faouzi Tarkhani & Bilkis Khanam

C ONSIDERABLE UNCERTAINTY HANGS OVER the world economy at present. While

The conjunction of an information technology boom and an acceleration in pro-

In order to compare the relationships between investment in information tech-

multifactor productivity gains in information technology-using industries as a

Third, on the labour side, university-educated workers are often identified as

More specifically, semiconductors are an output of the electronic components

The Extended Accounting Framework

O UR ANALYSIS OF THE SOURCES OF ECONOMIC GROWTH employs an aggregate

Following Christensen and Jorgenson (1973), this study introduces several

In addition, we treat other types of consumer durables, including information

The Production Possibility Frontier

In the production possibility frontier, output (Y) consists of consumption goods

The production possibility frontier can be represented as:

Y [ YIT ( I IT , C IT , OIT ) , YNIT ( I NIT , C NIT , ONIT ) ] =

wYIT ∆lnYIT + wYNIT ∆lnYNIT = vK IT ∆lnK IT + vKOME ∆lnKOME + vKS ∆lnKS

Labour productivity is defined as the ratio of output to hours worked, so that

∆lny = vKNIT ∆lnkNIT + vK IT ∆lnkIT + vLU ∆lnA U + vLNU ∆lnA NU

where vK = vK + vK + vK and vK = vK + vK ; ∆lnkIT and ∆ ln kNIT are, respec-

tively, the growth of information technology and non-information technology

Output includes investment goods in the form of computers, software, commu-

Information Technology Outputs and Inputs ($ billion)

Canada United States

Capital Compensation 168.4 517.3 1,110.1 3,636.7

Labour Compensation 158.2 461.1 1,645.8 5,112.9

Business investments in computers, software, and communication equipment are

Figures 1a and 1b show that the output of information technology equipment

Harchaoui, Tarkhani & Khanam

1981-2000 1981-88 1988-2000 1988-95 1995-2000

1981-2000 1981-88 1988-2000 1988-95 1995-2000

Information Technology and Economic Growth

Harchaoui, Tarkhani & Khanam

1981-2000 1981-88 1988-2000 1988-95 1995-2000

1981-2000 1981-88 1988-2000 1988-95 1995-2000

Information Technology and Economic Growth

Output Shares of Information Technology by Type, Canada

Output Shares of Information Technology by Type, United States

For our aggregate framework, we require an aggregate measure of capital ser-

Generally, for similar information technology assets, Canada’s depreciation rates

Business information technology investments, as well as purchases of computers,

Figures 2a and 2b give the information technology capital service flows as a

Input Shares of Information Technology by Type, Canada

Input Shares of Information Technology by Type, United States

The rapid accumulation of software is less affected by services price declines in

Tables 2a and 2b also present estimates of the flow of information technology